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Rajan rules out rate cuts unless inflation tamed


Mumbai: Reserve Bank of Governor (RBI) Raghuram Rajan on Monday ruled out any further interest rate cuts till such time inflation came down to the comfort zone, and once again asked commercial banks to lower the cost of credit to their customers.

“Inflation projections are still at the upper limits of RBI’s inflation objective,” Rajan said in his last Governor’s Foreword to Annual Report released here, referring to the government-mandated level of 4 per cent annual retail inflation, plus or minus 2 percentage points.

“With the Reserve Bank needing to balance savers’ desire for positive real interest rates with corporate investors’ and retail borrowers’ need for low nominal borrowing rates, the room to cut policy rates can emerge only if inflation is projected to fall further,” he said.

In any case, the task of taking a call on the interest rates is to be handed over to a new Monetary Policy Committee, that will comprise three representatives from the central bank — including the RBI Governor as its chair — and three others to be chosen by the government.

Rajan also said the willingness of commercial banks to cut lending rates was muted, since the level of corporate investment had reduced the volume and scope of new profitable loans for banks. The stressed assets of the lenders was also preventing them from taking fresh exposures freely.

As regards growth, he said, while the economy was showing signs of picking up, it was still below the levels that the country was capable of.

“The key weakness is in investment, with private corporate investment subdued because of low capacity utilisation, and public investment slow in rolling out in some sectors,” said Rajan, who is scheduled to demit office on September 4 and hand over the reins to Deputy Governor Urjit Patel.

RBI projected the overall GVA (gross value added) growth at 7.6 per cent in 2016-17, up from 7.2 per cent last year.

GVA is the measure of goods and services produced in an economy minus the intermediate consumption.

“Service sector activity is likely to receive a stimulus especially under the category of public administration, defence and other services as public expenditure on wages, salaries and pensions translates into disposable incomes,” RBI’s annual report for 2015-16 said.

Rajan also called for ushering new owners or managers for companies whose loans accounts have gone sticky, to improve their operational efficiency. According to him, where it is necessary, new management teams have to be brought in, sometimes as owners, and where not possible, as managers.

“Creative search for new management teams, including the possible use of public sector firms or private sector agents, is necessary, as are well-structured performance incentives such as bonuses for meeting cash flow/ profit benchmarks and stock options. Of course, if the existing promoter is capable and reliable, they should be retained,” he said.

One of the critical components of the medium term strategy in the financial sector will be to strengthen the public sector banks in all aspects, including governance, cost structure, and balance sheets, he said.

“We will also focus on enhancing our communication with the broader public, with a view to informing them on what they need to do to take best advantage of financial opportunities, as well as protecting themselves,” Rajan said.

Rajan said the grievance redressal mechanism in the rural areas as well as to the weaker sections of the society will be strengthened.

He said the RBI will work to enhance grievance redressal procedures, both within the financial institutions, and if the customer is still unsatisfied, subsequently through the RBI’s ombudsman scheme.


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