Column: Does RBI get it? There is no credit

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: Much as one would like to give kudos to Reserve Bank of India for quietly putting the focus back on liberalisation of the financial sector in its recent review of the monetary policy, its stoic silence on how to grow credit when India’s growth pattern is still wavy and fragile is regretful. Just for record, India’s non-farm food credit has dropped to single-digit level to 9.66% after 12 years for the year up to October 23.

RBI governor Duvvuri Subbarao has deftly shifted the debate from the need to boost economic growth to managing inflationary expectations. He is clearly more concerned about rising prices today, though everyone reckons that much of the increase in the wholesale price index is because of food items. It is not unknown either that the significantly higher consumer price inflation (CPI) also derives from rising prices of food products that have a higher weightage in the CPI.

That India’s recovery needs deeper nurturing by making credit available at affordable rates did not seem to have cut much ice with RBI, despite the fact that many sources of funding available last year have disappeared. Instead, it has sought to justify the low credit offtake by citing poor demand from the industry. This argument is specious, more because banks don’t want to lend. They have turned pessimists for fear of delinquencies. A clear pointer to this is their huge investment in government securities—almost 30% of deposits—compared to the statutory liquidity requirement of 25%. While larger corporates get all the money at best rates, the small & medium enterprises never make the grade.

Strategically and systematically, the central bank had started building a case for unwinding of the easy monetary stance from the beginning of this financial year. Way back in April, RBI was worried about the consumer price index that was in double digits. And then by August-end, it turned squeamish about rising prices and had said that keeping the monetary policy loose will endanger growth prospects in the medium term. The wholesale price index based inflation then stood at -0.21% for the week ended August 22.