The Hindu Business Line : Cut to 2009

When the Reserve Bank of India began its monetary loosening in September, soon after the fall of Lehman Brothers and the onset of the financial crisis, the stated aim was to encourage greater liquidity flow to the banking system and to the productive sectors. Since September 16, when Wall Street began to crumble, the RBI and North Block have sought to inject additional resources for both consumption and production with rapid-fire policy initiatives, such as cutting key lending rates and offering fiscal incentives. Just how successful have these measures been?

Policymakers will say it is too early to pass judgement on initiatives that work with a time lag. That’s where the problem starts. Signs of a slowdown in industrial output and consumer demand were evident in January, with the first quarter of the new fiscal setting in motion a trend that gathered speed; so ideally monetary policy should have eased well before it did. Assuming, however, that systemic inefficiencies will delay the play of the new policies, one reasonably expected banks to have begun a more generous flow of credit to the consumer and producer. Evidence, however, suggests otherwise; in fact, their risk aversion has led to a heightened flow of newly-released resources into government securities. Between the end of September and the start of November, fortnightly non-food credit growth has declined dramatically. In the fortnight ending September 26, non-food credit grew by Rs 51,234 crore; the following fortnight it climbed even higher but then by early November, it had fallen to Rs 16,532 crore and halved by December 5. Lower demand by oil companies following the continuous slide in global oil prices may partly explain the dip as much as falling overall demand. But the RBI initiatives throughout the period when banks were lending less were meant to reverse the slide: to lower funding costs and encourage lending. On the contrary, over the same period, bank investments in government securities grew dramatically. In the fortnight ending September 26, there was a fall in market borrowings by Rs 17,553 crore. Then they began to climb steadily so that in the fortnight ending December 5, Government borrowings rose by Rs 38,334 crore. Both trends are reflected in a flat credit-deposit ratio and a rising investment-deposit ratio.

The signal from the system, then, is that bankers are still wary of lending and that the current lending rates are still too high to make non-food credit attractive enough for banks and borrowers to meet one another. With inflation dropping to the lowest level in months, a steeper rate cut could be the best way to begin 2009.

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