With the hope of next round rate cut by the apex bank in June 2, Finance Minister Arun Jaitley is expecting that it may now be driven more by growth considerations as inflationary momentum is likely to remain subdued.
“It’s time for Reserve Bank of India (RBI) to cut rate in view of moderation in inflation and subdued industrial growth. When asked if it’s time for RBI to cut interest rate, Jaitley replied in the affirmative. “My views are well-known. It is (the time),” he said while addressing a press meet on one year of the Modi Government,
Meanwhile, the Finance Minister could not draw any conclusion on bad loans or non-performing assets (NPAs) which stood at around 5.2 per cent level. “It’s too early to consider the improvement in the bad loan situation last quarter as a “turnaround” and was keeping his fingers crossed. I would take it (drop in March quarter NPAs) only as an initial indicator. At times, when you try to revive the economy, some indicators can always be patchy. I am not drawing any final conclusion from this,” Jaitley said.
“If this pattern continues over 2-3-4 quarters, then I will draw a conclusion that there is a pattern. I am keeping my fingers crossed,” he added.
As far as the rate cut issue is concerned, the central bank has lowered its policy rate twice so far in 2015, but maintained status quo at the recent policy meet on April 7 in the wake of unseasonal rains impacting food prices.
The repo, the rate at which the RBI lends to banks, is currently 7.5 per cent and the cash reserve ratio (CRR), the amount of deposits that lenders park with the central bank, 4 per cent.
According to analysts, the mix of slowing inflation and a weaker-than-expected growth is building the case for a softer policy. While a rate cut on or before June 2 is most likely, beyond that, any room for additional rate cuts depends on structural reforms of the Government.
However, there is risk of monsoon being lower than average, potentially affecting crop production. Retail inflation eased to a 4-month low of 4.87 per cent in April while industrial output slowed to a 5-month low of 2.1 per cent in March. At wholesale level, the deflationary pressure has persisted for the sixth month in a row, with WPI inflation now at a new low of (-)2.65 per cent in April.
These macro economic indicators strengthen the Government’s and the industry’s call for a lower rate regime. “We are penciling in a 25 per cent repo rate cut by RBI on June 2 or even before that,” SBI said had said in a research note.
“We are convinced that retail inflation trajectory will be significantly benign on the back of a loss of purchasing power in rural economy,” the SBI had said, adding that if inflation numbers stay below 5 per cent, there is an outside chance of an additional 0.25 per cent cut.
On bad loan menace, Jaitely, however, said, “A good signal has emerged that the quarter that ended in March 2015, NPAs have started coming down. This is the first quarter, NPAs in banks were increasing, and they have started coming down.”
The NPAs of the total advances had reached a high of 5.64 per cent but period ending March “it has come down to 5.2 per cent. These (5.2 per cent NPA) are also high,” he said, adding that from the decline in one quarter it cannot be concluded that this was a turnaround.
As of December 2014, gross NPAs of PSU banks were at Rs 2,60,531 crore or 5.6 per cent of the total advances. Echoing similar views the Reserve Bank Governor Raghuram Rajan had said last week that there was no danger of any financial crisis but it may be early to declare that the worst was over on the NPA front.