Sustained low inflation necessary for lower cost of funds: RBI

Sustained low inflation necessary for lower cost of funds: RBI

Reserve Bank of India’s Deputy Governor Urjit Patel has said “Sustained low inflation and a credible programme of fiscal rectitude by the government are crucial to lowering cost of capital”, making remark that the central bank was unlikely to be swayed by short-term inflation trends while deciding monetary policy.

With wide expectation raising from the industry while hoping that the reserve Bank will cut rates at it next monetary policy meeting on September 29. This time the market is expecting a cut of at least 25 basis points. There are many in the industry who are tumulting for more as according to them a deep rate cut at this point will lay fruitful results for a good economic growth.

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The latest comments from the deputy Governor of RBI however, likely to pour water on the raising expectations of the people who are looking on the brighter side for the rate cut.

The painful comments from Urjit Patel says

“Sustained low inflation which anchors inflation expectations at a low enough level is an important ingredient for making the cost apposite to that particular level of inflation and inflationary expectation. It’s not inflation last week or last month, but it’s medium-to long term inflation”.

Inflation  that points out to be a keen indicator when RBI decides the interest rates is keeping a low from last several months. The wholesale price Index (WPI) is considerably making its negative downturn from past 10 months, while the retail inflation (CPI) eased to grow to 3.66 % in August.

In the last bi-monthly meeting of RBI held on August 4, the policy rate remain unchanged keeping in track of the rising inflation level.

He also added “fiscal deficit of both the central and state governments also play an important role in determining the cost of fund as the center and states combined together are the largest borrowers in world over”.

“The other is credible programme of fiscal rectitude by the government… both the central and state governments can help… and the reason is they are in direct competition with other long-term borrowers,

He also addressed that the higher cost of restructuring pushes the cost of fund and RBI is looking forward to find solution of this issue.

“The higher the cost of restructuring, the higher the cost of debt workout, the more it builds in the cost of capital from the side of the lender, and this is something we are in middle of addressing,” he said.

In addition, he said a competitive, vibrant banking system is important for lowering cost of capital, and a lower taxation too is helpful.



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