Growing the bond market more important than repo rate tweaks–07.12.2017

Anticipating hardening inflation and consolidating growth, the Monetary Policy Committee (MPC) has decided to maintain a neutral stand, neither raising nor lowering policy rates. Few would be devastated or jump with joy.

Outside the narrow world of fixed-income specialists, MPC’s policy tweaks or non-tweaks have ceased to matter much: the real action relating to growth and inflation lies outside the remit of the central bank. The government’s announcement of a large public investment programme in infrastructure, along with major recapitalisation of the banks, matters more to growth than a quarter of a percentage point reduction in the policy rates. Companies are focused on the resolution of bad loans and on the changes being wrought in the goods and services tax (GST), which can impact retail prices directly.

MPC expects growth in 2017-18 to be at 6.7%, the same rate it had expected two months ago, despite further evidence of improving growth in the world economy. What could surprise MPC and the Central Statistics Office that prepares India’s national income accounts is a possible uptick in the financing of the small and medium enterprises, as informal finance gives way to formal, accounted-for funding from sectors that would report their activity — thanks to GST and the illuminating light it throws into the books of all companies that want to take input tax credit. And the government cannot afford to sit on its hands after having announced its Bharatmala scheme of extensive road connectivity. If the money garnered by the National Investment and Infrastructure Fund gets deployed on the ground, and fast, growth could surprise.

The measures announced to lower the cost of using debit cards are welcome. But the developmental and regulatory focus of the RBI must be on the debt market: future infrastructure projects must be financed by bonds, rather than by bank loans. The RBI must also cooperate in the ongoing efforts to banks and indebted companies to find solutions short of liquidation. Such measures, too, would matter more than minor cuts in the repo rate.

via Growing the bond market more important than repo rate tweaks

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