Interest rates: Benign inflation allows room for further cuts, says RBI governor Shaktikanta Das

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Updated: September 20, 2019 6:56:38 AM

The US Federal Reserve on Wednesday cut rates by a modest 25 basis points. Bank of Japan maintained status quo on rates on Thursday but is expected to review it.

Eye on growth, inflation, rate cut, Shaktikanta Das, economy news, MPC, monetary policy committee, NBFC, corporate governance, Bank of Japan, RBIThe governor added that the RBI’s first preference will be to find a market-based mechanism to resolve the problems of NBFCs.

A downward trajectory for inflation through the next one year would allow more room for repo rate cuts, Reserve Bank of India (RBI) governor Shaktikanta Das said on Thursday. The rate-setting monetary policy committee (MPC) is set to meet in early October and announce its policy decision on October 4.

Das also hinted that banks may be forced to take relatively larger haircuts on their exposures to non-banking financial companies (NBFCs) which are plagued by issues of corporate governance.

“Today, when we see that the price stability is maintained and inflation is much below 4% and is expected to be so in the next 12-month horizon, there’s room for rate cuts, especially when growth has slowed down,” Das said at the Bloomberg India Economic Forum (BIEF) 2019.

Central banks across the world are acting in a synchronised manner to support growth. While the European Central Bank cut the interest rate on bank reserves earlier this month, it also announced that it would restart its quantitative easing programme. The US Federal Reserve on Wednesday cut rates by a modest 25 basis points. Bank of Japan maintained status quo on rates on Thursday but is expected to review it.

Das said the power to issue directions for mergers or takeovers of NBFCs was given to the central bank only recently and reiterated that the RBI is monitoring the top 50 NBFCs and housing finance companies (HFCs) which account for 75% of all outstanding loans from non-banks. “As and when the situation arises in any one of them, we will use this power,” the RBI governor said.

The governor added that the RBI’s first preference will be to find a market-based mechanism to resolve the problems of NBFCs. These would mean that current promoters go for stake sales, bring in fresh funds or choose to securitise their assets. “The resolution process will have to be market-linked and in this banks and other lenders will have a major role to play. NBFCs where there are major governance issues, they (banks) need to take a larger haircut. There are business failures but there is also an element of administrative or governance lapses. So, banks will have to take a balanced call,” Das observed.

On the question of growth and whether the government should go on a spending spree, the governor sought what he called a “nuanced understanding” of the idea of fiscal expansion. “A conventional way of looking at expansion means that you increase the outlay, but the way I like to look at it is to ensure that the quality of expenditure is maintained, that the benefit reaches the targeted segment, that the leakage is prevented,” he said.

Das cited the direct benefit transfer (DBT) scheme as an instance of a measure which improves the quality of expenditure because it prevents leakage and ensures that the benefit of the subsidy reaches the actual deserving beneficiary. “So far as fiscal policy is concerned focus, I think, similar focus needs to be continued,” Das said.

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