While there are several domestic and international examples of recapitalisation bonds having worked, none of them have prevented further NPAs from piling up.
With the government planning a fiscal push, it is likely that the central bank will be concerned with price stability and not rate cuts in its October policy meeting.
To restore confidence, better governance, rather than any additional fiscal push, is the need of the hour.
Any flippant talk of rupee devaluation would only damage India’s reputation as a credible, mature emerging economy and make crucial imports more expensive.
At Rs 128807.81 billion, liquidity is now at an all time high. This rise has to be absorbed to keep inflation in check.
The latest refusal to cut rates, and the MPC’s decision to decline meeting with finance ministry officials before its deliberations on monetary policy, will be hailed by those who are interested in good governance.
Nirmala Sitharaman’s insistence that currency fluctuations are the “new normal” hides a crucial fact: that the “real effective exchange rate” is affected by the fiscal decisions of central and state governments.
Both the former and current RBI governors are surely acquainted with the Gujarati saying “Kona Baapni Diwali”. This cannot be the Centre’s stance when it comes to solving India’s NPA crisis.
If the monetary policy committee waits until April, it will have a better idea of demonetisation’s negative impact and a firmer grasp of global commodity price trends.
Inflationary concerns aside, we also have to realise that fiscal deficits are always accompanied by trade deficits.
Improving export competitiveness depends on the government, through prudent fiscal policy, and the RBI, through appropriate monetary policy that maintains price stability.
Though India will be affected and the rupee may weaken, comforting levels of foreign exchange reserves will likely soften the blow. Emerging economies with high external debt measured in US$ will suffer more.
Everyone knows why the previous governor of RBI had to leave. Urjit Patel understands the circumstances under which he assumed charge but has still risen to the occasion.