The decision of the Reserve Bank of India (RBI) monetary review policy meeting will come today. In two monetary reviews of the last four months, RBI Governor Dr. Shaktikanta Das did not change the interest rates but assured that it could be decided further. Financial experts say that the negative rate of GDP for two consecutive quarters has brought the Indian economy into recession. With this, retail inflation rose to 7.61 percent in October. In such a situation, it will be difficult to cut the interest rate and make the loan cheaper.
It is noteworthy that the rate of inflation has consistently remained above the Reserve Bank’s medium-term target of four per cent. Lakshmi Iyer, President and CIO (Debt), Kotak Mahindra AMC, said that the scope of the cut in interest rates in the upcoming monetary review is limited. In this situation, the RBI may adopt another measure to increase liquidity in the economy. Significantly, the meeting of the Monetary Review Committee started on December 2 and the committee will announce the monetary policy on December 4 today.
1. Overcome Inflation
In the midst of the Corona crisis, rising inflation has become a matter of concern. Retail inflation rose to 7.61 percent in October, well above the RBI’s target of four percent. Inflation has risen due to expensive food and drink. In such a situation, controlling inflation is going to be a big challenge for RBI.
2. Putting the Baptist Economy back on track
Indian economy is in recession due to Corona epidemic and lockdown. In the second quarter too, GDP fell by 7.5 percent. The challenge is to bring the economy back on track by increasing demand amid rising inflation. If the RBI lowers the interest rate to increase demand, then inflation will increase more rapidly. The RBI will have to take measures to deal with this dual challenge in the upcoming monetary review.
3. NPAs of Public Sector Banks
According to the Financial Stability Report released by RBI, the NPAs of banks, ie non-performing assets, may increase to 12.5% by the end of the current financial year. The NPAs of banks stood at eight and a half per cent in March 2020. It is clear from this that the lockdown imposed due to Corona virus has affected the businesses greatly and the condition of banks has deteriorated. Dealing with the increasing NPAs of banks is going to be a big challenge for RBI.
4. Availability of cheap loans
In the midst of the Corona crisis, the availability of cheap loans is necessary to increase demand. Cheap loans help increase demand, but in the circumstances, it will be difficult for RBI to make loans cheaper for the second time. This will create obstacles in the way of increasing demand which will slow down the pace of bringing the economy back on track.
5. Fiscal situation
The fiscal situation is acute. The fiscal deficit of the central government is expected to be over eight per cent of GDP in FY 2021 as against the budget estimate of 3.5 per cent at the beginning of the year. There will also be a major fiscal problem for the states. Helping the government control the fiscal deficit is going to be a big challenge for the RBI.
RBI monetary policy committee meeting begins, results will be announced on December 4