To maintain the pace of growth, it is necessary that the repo rate should not be increased further, therefore, the Reserve Bank has kept the repo rate unchanged at 6.5 percent for the third consecutive time in the monetary review on 10 August. Earlier, the repo rate was kept unchanged at 6.5 per cent in two consecutive bi-monthly monetary reviews in April and June this year. The Reserve Bank started increasing the policy rates in the month of May last year, but at the time of the bi-monthly monetary review of April and June this year, the retail inflation situation in the country was not uncontrollable, due to which the repo rate was kept unchanged.
The Reserve Bank’s objective behind not changing the repo rate on August 10 was that the cost of borrowing should remain stable, and the growth rate should also be maintained, but this time the Reserve will have to be cautious about inflation, because it is continuously on the rise mode. On the other hand, despite keeping the repo rate unchanged by the Reserve Bank, some government and private banks have increased the lending rate, which may defeat the objective of the central bank. However, banks are also forced to raise lending rates, as their cost of capital has increased and the spread between deposit and loan rates has narrowed, reducing their profits, and compel them to make a strategy to expand the deposit base. The banks will have to run a campaign for making it possible. Though, some banks are doing this on priority basis. After a continuous decrease in retail inflation for the last 4 months, the consumer price index (CPI) or retail inflation in June 2023 reached a level of 4.81 percent, while it was 4.31 percent in May, whereas it was 4.7 percent in April 2023, while it was 5.66 percent in March. However, even in the month of June, the retail inflation rate is below the Reserve Bank’s tolerance level of 6 percent, but this year heavy rains in many states of the country have adversely affected the production of Kharif crops and vegetables and expected that the situation will worsen in the coming months. The threat of El Nino remains intact. In such a situation, there are chances of further increase in retail inflation in the coming months.
According to statistics ministry data, the Consumer Food Inflation (CPI) or food inflation rose to 4.49 per cent in June from 2.96 per cent in May, compared to 7.75 in the same period of last year. Whereas in the month of April, it was 3.84 percent. The prices of almost all green vegetables including tomatoes are shoot up at present. It is noteworthy that food items account for half of the CPI basket.
The RBI tries to fight inflation mainly by increasing the repo rate. When the repo rate is high, banks get loans from the Reserve Bank at a costlier rate, due to which banks also give loans to customers at a costlier rate. By doing this, the liquidity of money in the economy decreases and due to lack of money in the pockets of the people, the demand for goods decreases and due to the high price of goods and products, their sales decline, which leads to deceasing of inflation. Similarly, to speed up the developmental works when the economy is slow, efforts are made to increase the liquidity of the currency in the market and for this the repo rate is cut, so that the banks get loans from the Reserve Bank at a cheaper rate & also give loan to the customers at a cheaper rate.
According to Reserve Bank Governor, Shri Shakti Kant Das, banking, and nonbanking financial institutions (NBFCs) remain strong in India despite the corona pandemic, geo-political crisis, inflation, slowdown in the global economy. The financial performance of the banking sector is continuously improving. In the first quarter of the current financial year i.e., during April- June 2023, the profit of 12 public sector banks increased to Rs.34,774 crore, while the profit of State Bank of India increased by 178.24 percent to Rs 16,884.29 crore.
At the same time, an increase of 12.3 percent was registered in the country’s industrial production in the month of June. In comparison, in June 2021, a growth rate of 13.8 percent was seen in the industrial production of the country. It shows that there is great need to improve the situation in this regard. In the last quarter of the financial year 2022-23, the gross domestic product (GDP) was estimated to be 4.2 percent, but it was 6.1 percent. Due to the improvement in the GDP growth rate in the fourth quarter of the financial year 2022-23, there has been an improvement in the growth rate of the entire financial year. During the financial year 2022-23, the MPC had earlier estimated 6.8 percent of GDP, which was 7.2 percent.
Right now, the target of the Reserve Bank is to follow the path of development, so that the economy gets strengthened, at the same time it is also keeping an eye on retail inflation, because of this, the pace of GDP growth slows down. For the past years, retail inflation remained at a high level continuously, however, there was a partial decline in retail inflation during the last few months, but now again retail inflation is on the rise. Therefore, speculations are being made that India’s growth rate may remain low in the long term, due to which the economy may slow down. Slower economic growth may result in lower tax collections. The year 2024 is an election year. Therefore, this year the fiscal deficit may increase instead of decreasing, as the government may increase government expenditure to woo the public for getting vote.
Right now, the government is stressing on capital expenditure. It is also necessary because India needs huge investment in infrastructure. Only through this, the vehicle of development can move forward at a fast pace. In such a situation, the government will have to accelerate both capital expenditure and revenue collection and work towards fiscal consolidation by striking a balance between the two, as there are dangers of strengthening infrastructure by taking more loans.
In such a situation, it can be said that due to rising inflation, the Reserve Bank may be forced to increase the policy rates in the upcoming monetary reviews and subsequently, banks will increase the loan rate and demand will decrease due to costlier loans. Due to rising inflation, the spending capacity of the people has also reduced, due to which private expenditure is coming down in strengthening the infrastructure. Therefore, keeping the repo rate unchanged by the Reserve Bank is an immediate step. Stability will come in this only when the retail inflation is low. Nevertheless, this decision of the Reserve Bank can be called expedient & suitable keeping in the view of present circumstances. (Writer is Ahmedabad based Senior Columnist, Views are personal.)