But the bitter truth is that business houses are not leaving any stone unturned to build pressure on RBI for lowering of interest rate. Politicians of all colour and creed who do not understand the intricacies of the economic principles or who do not want to understand it wilfully to serve their political agenda are time and again putting pressure on RBI to lower interest rate. Finance Ministers during UPA rule or now in NDA rule are thinking in the same fashion that only lowering of interest rate may cure the sick banks and may give a boost to economy. As if interest is panacea for all ailments.
Politicians do not try to understand that if banks are forced to reduce interest rate on loans and advances, they will have to lower interest rate they pay o deposits which they receive from savers. And if savers particularly pensioners or person whose livelihood depend on interest will face greater difficulty if interest rates are lowered on their savings. They will be forced to put money for higher interest with local money lenders or Chit fund companies or NBFC . This will definitely erode the deposit base of lending banks and hence deplete their lending capacity. When their resources will shrink, they will naturally will not lend or try to borrow money from RBI or other costlier sources. This will further cut their capacity to lower rate or cut their net interest margin and finally cut their profits.
Further , continuous rise in bad debts is causing banks greater pain and erosion in their interest income. Volume of bad debts has been consistently increasing in all banks due to various reasons. Banks are constrained to write off loans and interest . Again their profit and capital gets eroded. If their profitability get eroded further by interest cut , health of banks will further deteriorate. RBI Governor is therefore perfectly right in not lowering interest rate . He is right in saying that only Stimulus to business houses cannot help in giving a boost to economy.
After 2008 financial crisis is USA , India claimed that US crisis had not impacted Indian economy. Still the then UPA Government gave away hundreds of crores of rupees to Corporate houses in various forms of subsidy. Government advised banks to give all relief to business houses without ascertaining the fact whether the business houses were affected by US crisis or not. GOI allowed Public Sector Banks to give interest concessions as per their whims and fancies and allowed them to restructure bank loan if the same was irregular to stop slippages in NPA category.
Previous Government inculcated a wrong culture in minds of bankers who used this tactics to conceal all bad loans . This is one of prime reasons that ratio of gross NPA and that of stressed assets in PSBs have grown to such a large extent. Stimulus allowed by banks and GOI to corporates after 2008 crisis were as good as Jugaad tools used by UPA government , but they did not yield an fruitful result , rather they damaged the sound economic health of the country. This happened despite opposition by the then RBI Governor Mr. Suba Rao.
It is good luck that RBI Governor Mr. Rajan has understood the main problem public sector banks are facing and hence he is trying to prescribe proper medicine and not sticking to 'Jugaad' tools as suggested by clever politicians .He does not believe in temporary solution and neither does he believe in artificial or manipulated growth of banks. He does not want window dressing . He does not want bankers to book higher profit by window dressing . He does not want that banks should hide bad loans , he does not want banks to reduce provisions by fraudulent measures and he does not want banks to boost profit by fraudulent methods.
Let us see how far Mr. Rajan gets success in his Utopian ideas. I say Utopian because I know the nature, attitude and character of Indian politicians.
Also read my Blog "RBI Governor Does Not like Jugaad"
Why Raghuram Rajan Believes Low Rates Aren't the Only Growth Pill-NDTV-20th September 2015
When it comes to interest rates, mum is the word for any central banker ahead of the credit policy. And the RBI Governor is no different.
But he is one central banker who is known to speak his mind. Every word he says makes policymakers sit up and take notice.
"I know these cameras are here not to see me speak on core competencies but on interest rates - so let me offer my standard disclaimer," RBI Governor Raghuram Rajan told a hall packed with industry captains, economists and mediapersons while delivering the CK Prahlad Lecture in Mumbai today.
"For any hints of what we may do in the upcoming policy, please read the guidance in our last policy."
The timing of his lecture today was key for two reasons - the RBI Governor was speaking hours after US Federal Reserve Chief Janet Yellen decided not to hike interest rates, coming as a relief to economies like India that have seen stock markets rallying as a response to Fed's decision. Plus, ten days from now the RBI has to take a call on whether or not to cut interest rates at a time when inflation in India has touched historic lows and pressure is mounting from all sides to deliver a rate cut to boost growth.
Despite his assertion not to draw any veiled inferences from the contents of today's speech, he did give three useful insights into why he thinks low interest rates alone cannot spur the growth of any economy. And why he believes sustainable growth needs a lot more that just low rates and giveaways for the industry.
For one - he says, reforms (and not rates) hold the key to India's sustainable growth. "We have to expand the sustainable growth potential. That means continuing to implement reforms that government and regulators have announced that is the only way to get sustainable growth potential up," he said. A crystal clear message to the government - walk the talk, implement the reforms.
His second assertion was to learn from the experience of Brazil - an economy that was delivering an impressive 7 per cent plus growth rate just a few years ago and is now likely to shrink over 3 per cent. He says Brazil's central bank was "pressed to lower rates" fueling a credit spree that now overburdened customers are struggling to pay.
Third, the Governor today made a key distinction between the interests of the "vocal borrower" and the "silent saver." So while low interest rates benefit borrowers - be it individuals or the industry, we forget that they hurt the depositors. The Governor felt it was important to keep the silent saver in mind while taking a call on rates. "For us at RBI, key task is to keep inflation low - not just today, but well into the future so that we get nominal modest rates that satisfy not just the very vocal borrowers but also the silent saver," he said.
Click Here To Read My Blog of 13th June 2015 Interest Rate is Not medicine to cure sick banks
But he is one central banker who is known to speak his mind. Every word he says makes policymakers sit up and take notice.
"I know these cameras are here not to see me speak on core competencies but on interest rates - so let me offer my standard disclaimer," RBI Governor Raghuram Rajan told a hall packed with industry captains, economists and mediapersons while delivering the CK Prahlad Lecture in Mumbai today.
"For any hints of what we may do in the upcoming policy, please read the guidance in our last policy."
The timing of his lecture today was key for two reasons - the RBI Governor was speaking hours after US Federal Reserve Chief Janet Yellen decided not to hike interest rates, coming as a relief to economies like India that have seen stock markets rallying as a response to Fed's decision. Plus, ten days from now the RBI has to take a call on whether or not to cut interest rates at a time when inflation in India has touched historic lows and pressure is mounting from all sides to deliver a rate cut to boost growth.
Despite his assertion not to draw any veiled inferences from the contents of today's speech, he did give three useful insights into why he thinks low interest rates alone cannot spur the growth of any economy. And why he believes sustainable growth needs a lot more that just low rates and giveaways for the industry.
For one - he says, reforms (and not rates) hold the key to India's sustainable growth. "We have to expand the sustainable growth potential. That means continuing to implement reforms that government and regulators have announced that is the only way to get sustainable growth potential up," he said. A crystal clear message to the government - walk the talk, implement the reforms.
His second assertion was to learn from the experience of Brazil - an economy that was delivering an impressive 7 per cent plus growth rate just a few years ago and is now likely to shrink over 3 per cent. He says Brazil's central bank was "pressed to lower rates" fueling a credit spree that now overburdened customers are struggling to pay.
Third, the Governor today made a key distinction between the interests of the "vocal borrower" and the "silent saver." So while low interest rates benefit borrowers - be it individuals or the industry, we forget that they hurt the depositors. The Governor felt it was important to keep the silent saver in mind while taking a call on rates. "For us at RBI, key task is to keep inflation low - not just today, but well into the future so that we get nominal modest rates that satisfy not just the very vocal borrowers but also the silent saver," he said.
Click Here To Read My Blog of 13th June 2015 Interest Rate is Not medicine to cure sick banks
Many of his critics will strongly disagree with his views arguing that if historically low inflation rates don't merit a rate cut, then what does? Shouldn't we be worrying about "deflation" rather than "inflation" as the Chief Economic Adviser Arvind Subramanian so clearly articulated recently.
But Dr Rajan's message is clear - he isn't succumbing to any pressures and will lower rates only when he feels the timing is right.
What's true is that Dr Rajan can be credited with putting India on a much stronger footing in his two years of Governorship. The Fed decided against a rate hike, but today India was far better prepared and a much stronger economy to deal with any global shocks than it was two years ago when he took over as the RBI Governor. In 2013, the taper tantrum sent Indian markets and the rupee into a tizzy putting us among the worst performing markets worldwide. Today, as Dr Rajan himself says - "India is an island of calm in an ocean of turmoil."
Dr Rajan, we're not taking any hints from today's speech. But for those who are taking a September rate cut for granted, be prepared for some surprises.
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