RBI governor Raghuram Rajan’s strategic stroke is a welcome move

Ultimately the much awaited ‘relief’ has been declared by the RBI governor. Raghuram Rajan waited patiently for the right time to execute the right stroke. Although our politicians and chambers of commerce kept on asking for a big bonanza, Rajan showed a mature governing approach to the entire dilemma of sustainable growth clubbed with affordable rate of inflation. His declaration of “50 basis point” reduction in the repo rate is a welcome move to boost our economy on various fronts.

Rajan’s insistence on the government’s economic performance is commendable. No government in the world can use an isolated monetary policy to curtail inflation. Inflation has to be mainly addressed through the process and policy of political governance. Our government, on the other hand, has kept on forcing the banking regulator to reduce the rate of cost of capital.

Rajan, before declaring the rate cut, reminded our political class about the primary deliveries of good governance. Without any hesitation, he spoke about the ‘bad loans’ gathered by most of our nationalised banks. When you don’t have adequate funds to lend, a rate-cut alone can’t support banking performance. These bad loans are mostly the result of political interference in our banking system. A rate-cut presumes that only good borrowers should benefit from it. Rajan would definitely require the constructive support of the political class to clean up the banking system.

The governor should also be admired for his logic of equilibrium between growth-based economics and sustenance of the people at the bottom of the pyramid. Only a person of his calibre, guts and right intentions can independently decide and execute a model which supports the idea of What is good for the 100 crore Indian population. He did not get influenced by the stock market indices and 20 crore rich Indians who mostly exploited the economic reforms of the last two decades.

When the other BRIC economies are not doing well, India certainly has an opportunity to prove itself as a global engine of growth. We need to carefully observe and analyse the impact of this rate-cut on India’s GDP growth and on the inflation rate for the latter to remain close to 5%. Global pressure and drought in India have brought down our estimation of growth from 7.4% to 7.2%.

The SMEs are the major facilitators of employment generation and equitable economic growth. Along with agriculture, SMEs should adequately benefit from the lowered interest rate. Our banks should transfer this rate advantage to the small, needy entrepreneurs and farmers. The delivery system of our banks is inefficient and biased. Hence, whatever are the productive intentions of the governor, the execution continues to be suboptimal.

With this rate-cut, a few banks may also reduce the interest rate on fixed deposits. This should not happen. Computerisation of the banks must reduce their transactional costs. Banks should manage their business with a reasonable interest spread. The regulator should intervene and restrict the huge pay packages offered to the top executives of many private banks. 

Without being unduly bullied by the American Fed’s routine exercise, our governor has declared his decision using sound economic wisdom. For us, most important is the purchasing power of the common man. On this background, Rajan and his team will have to firmly discipline our banks to respect the mandate of sustainable development.

Rajan is aware of the blatant mistakes that have been committed by western policymakers. For India, it is the responsibility of our finance minister now to see that the rate-cut advantage reaches genuine borrowers. On the pleasant eve of the festive season, this rate-cut may fuel consumerism among the masses but that should be pardonable for a growing economy. Fortunately, our overall governance mechanism is sound. Therefore Rajan’s rate-cut announcement should show some real vibrancy in our overall economic environment including in difficult sectors like agriculture and infrastructure.

The author is the chief consultant, Jakhotiya & Associates