Steps taken so far

Certain measures have been implemented by the RBI to make sure effective transmission of the policy rate cut. Reviewing the implementation of the marginal cost lending rate (MCLR) framework by banks, ensuring more liquidity in the banking sector and reducing volatility in the call money market, among other things, are some of the changes expected to provide flow of capital to profit making sectors of the economy. Currently, the main focus has been on the availability of credit for the industry to thrive. Credit disbursement to the industry remains weak.

The non-performing assets (NPA) levels in the banking sector have been increasing, especially in the infrastructure sector. The industrial growth story still remains shrouded with difficulties given protracted difficulties in exports and weak rural demand.

Notwithstanding the fact that the government has been undertaking various steps to speed-up the stalled projects (stalled projects declined significantly in recent period), it would take a longer time for the projects to get rolling and investment activity to gain traction. While lower capacity usage has led to a more restrained capacity expansion among the manufacturers, lower interest shown by private sector has led to a hindered traction in investments in the infrastructure segment. With the government’s firm stand to stick to a lower fiscal deficit target, foreign direct investment is going to play a critical role in increasing investment.

Interest rate is another aspect that is critical for monetary policy transmission. Subtle adjustments in the policy interest rate, for instance, has a direct impact on short-term money market interest rates which subsequently transmits policy impulse to the wide array of interest rates in the financial system—deposit and lending rates. This has a direct effect on saving and investment decisions of economic agents and eventually its final targets—output, aggregate demand and inflation.

RBI opted for an anti-inflationary stand between September 2013 and January 2014 to rein in expectations and impart some credibility to its inflation targets. From 2015, RBI embarked on a rate easing cycle. The three broad factors that led to this policy decision are—dip in the inflation rate below the target level set by RBI, continued windfall from lower global oil and commodity prices and hence fall in inflationary expectations, and a need to speed up the pace of domestic demand.

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