ET View: Repo rate cut welcome, but rigidity and constraints remain

The RBI’s repo rate cut, many think, should have been sharper, 50 basis points at least. However, it would not have made much of a difference to credit growth or the cost of credit, which are constrained, still, by the overhang of bad loans and rigidities in the credit market—segmented markets, a shallow corporate bond market and the reliance on constantly rolled over short-term loans from scantily capitalised non-banking finance companies to fund segments of industry and infrastructure.

The RBI did well to reiterate its backing for the process of resolving bad loans under the Insolvency and Bankruptcy Code, notwithstanding the Supreme Court’s annulment of its February 12 circular. Instead of seeking resolution of a class of bad loans, as the Feb 12 circular had, the RBI will need to make specific references. That means a little more paper work, but not an insurmountable hurdle.

It is also welcome that the RBI expects growth to accelerate in the 2019-20 fiscal. The huge amounts of money being spent by political parties, as part of the election campaign, will give a boost to economic activity in the first quarter, and if recapitalised banks find the will to start lending again, and the private sector given a chance to take part in infrastructure building through public-private-partnership contracts that absorb the lessons from past mistakes, we should expect a revival in private investment, pushing the investment rate (share of gross fixed capital formation in the GDP) back to upward of 33%, from the current level of 29% of GDP. Regardless of a global slowdown, India should sustain growth in excess of 7%.