Cheer for the economy, RBI just loosened the taps on funds | comment | Hindustan Times
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Cheer for the economy, RBI just loosened the taps on funds

comment Updated: Aug 05, 2014 23:41 IST
Hindustan Times
Reserve Bank of India

On Tuesday, Reserve Bank of India (RBI) governor Raghuram Rajan infused an additional Rs40,000 crore for banks to lend to productive sectors of the economy when he cut the statutory liquidity ratio (SLR) by 0.5 percentage points to 22%. A lower SLR would mean banks will have more money to lend to industry and individuals.

Holding cash is costly. So, the flush of capital could goad banks into cutting interest rates, leading to a multiplier effect of greater investment and more jobs.

Importantly, there is a clear change in the tenor of its commentary from the earlier unwavering focus on inflation control to a pro-growth approach.

Amid incipient recovery signs, business leaders have been ratcheting up their demand for a cut in borrowing rates to aid an industrial turnaround. Mr Rajan may have left them a trifle disappointed, but they should take heart by reading between the lines in the accompanying policy statement. The RBI’s prognosis about the broader economy’s health, and its views about external and internal risk factors are similar to those of the government as well as from other data points emanating from the real sector. The RBI has good reasons to believe that sentiment on domestic economic activity appears to be reviving as indicated by the central bank’s industrial outlook survey in the second quarter. According to a monthly HSBC survey, production activity in Indian factories jumped to a 17-month high in July driven by a flood of orders, rekindling hopes of rebound in the Indian economy, battling to claw out of a quarter-century slump.

The RBI has loosened the tap on funds for private industry a bit. As opposed to lending rate changes, which are blunt monetary tools, measures such as a cut in the SLR works through the secondary channel; the impact is, therefore, more sticky and act as appendages to fiscal policy measures. The onus is on the government to hasten the implementation of stalled projects and push ahead with the measures that were announced in the budget to assist the revival. Policy-making in times of slowdown is not a zero-sum game. The RBI’s nuanced phraseology and change in drift clearly demonstrates this.