Why India needs a bolder RBI - not a timid one!

The recent news highlights that corporate India is moving slow and records slower growth and profits. Someone should give some boost to the real economy and Financial Thoughts believe RBI has big role to play.

One of the reasons for this dismal performance is traceable to RBI’s macro monetary risk management.

India had once became tantalizingly close to 10% growth p.a. However, RBI saw monstrous threat in single digit inflation level and began to adopt drastic measures and began to hike interest rates during the second half of 2011.

Why was RBI in a hurry to raise interest rates to beat inflation, when the inflation was mostly caused by oil price hikes? It is evident that blindly following standard prescriptions don’t help.

As Financial Thoughts had warned http://www.financialstrategyonline.com/2011/11/foolish-rate-hike-part-ii.html in 2011, India needs more supplies – just by choking demand, the RBI kills the economy. And it has proven true.

Current poor economic growth and corporate profits is due to RBI policy. Whilst RBI may point their finger to Govt. policies, no one can deny that RBI had played a big role in making the Indian growth rate pale in comparison to what China, Indonesia, Philippines, etc. have achieved. All these countries also import  oil!

The recent economic data such as GDP growth, industry production, unemployment, etc  are the worst in the recent past. What no one speaks is the Indian unemployment (already it is more than 20%-25%). The slowdown in the growth results in lesser opportunities. Frustrated youth will get more frustrated!

Who will go for expansion when the interest rates are uneconomically high and no feasible business transactions is possible? The result is that as expansions are curtailed, the CAPEX had declined. Investment in India has reduced ever since RBI has hiked its interest rates!

Have a look at the Capital Goods sector index of NSE/BSE and it will show the result. As investments in the economy drop, the accelerator and multiplier effect works against the economy. Economic activities dropped & dried up. Result is the sharp drop in turnover in many corporates and profits while interest burden increases. No wonder many companies reported losses since the interest rate hike began.

Then the banks suffered as the corporates struggled to settle and service the loans they took from bank. Most of the banks reported higher NPA and the banks shares dropped. Leading banks such as Canara Bank, Bank of Baroda, Corporation Bank, Andhra Bank, etc. all reported lower profits. Other banks did more or less the same. Now the banks will get scared and reduce lending. That could send the economy into another downward spiral. RBI induced vicious circle?!

To put salt to the injury caused by RBI policy, now RBI has tightened the rules of restructuring the debt and have recommended policies that will hurt banks further. It may be noted that RBI played a role to bring woes to the corporate world, which in turn affected lenders (banks) and borrowers (corporates). So they resorted to restructuring, which RBI didn’t appreciate.

Come on RBI! – Please give some respite!

Eurozone also suffers from inflation similar to India, but European Central Bank is more growth focused and has managed the macro monetary risks in a better manner. Despite fears of inflation, they have eased the monetary policy during early 2012. RBI should step in with monetary easing to further aid the economy and boost growth.   

India's current account is a critical macro risk and trade deficit numbers indicate that India has a trade deficit of USD 240-250 billion per annum. These are met by portfolio flows – FII and FDI – and it is in the better interests of India that we have good growth and profitability .

Hope RBI will slash the interest rates by1.5% to 6.25% during its next policy announcement. 

Financial thoughts believe, risking a little inflation is nothing but a calculated risk for India’s growth, well-being of its population by having more output, more employment creation, more job opportunities, healthier banks, increasing profits, more direct tax and indirect tax revenue for Govt., improving stock market, attracting more FDIs and FIIs.