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A large portion of housing and other loans are by now linked to the RBI repo rate. Therefore, changes in repo rates have a significant impact on the loan income of banks. Higher the repo rate, better will be the profitability of banks. Since RBI did not reduce the repo rate, high profitability of banks was preserved.
Additionally, the half-percentage cut in CRR will generate additional interest income of about Rs 7,000 crore on deployment of investments yielding minimum returns as the RBI does not pay any interest on CRR deposits.
Following the Bimal Jalan Committee report of 2019, the RBI will have to earn big profits to provide decent surplus transfers to the government and leave enough money with the RBI to maintain cash income reserves at the required level of 5.5 per cent of total assets. RBI also wants to increase its foreign exchange reserves to the highest level.
Both these objectives are well served by the RBI by net purchases of foreign exchange (selling more to replenish reserves at current prices to generate additional profits) with a depreciating rate of 2-3 per cent every year.
The situation has been somewhat different in the last two months – the RBI has been forced to sell foreign exchange reserves due to factors that are not under its control such as stock selling by FPIs, strengthening of the US dollar after Donald Trump’s victory. , etc.
From a monetary perspective, selling of foreign currency sucks up liquidity. The objective of building higher reserves has been temporarily backfired, although higher sales have boosted RBI’s profitability and the rupee has depreciated more than RBI had expected.
RBI’s monetary policy is not serving the objective of promoting growth with low inflation. Instead, it is maintaining high profits for the banks and RBI.
If RBI wants to have an impact on growth and inflation, it will have to do a lot of rethinking.
(The author is Subhanjali, Chief Policy Advisor, Author: $10 Trillion Dream and former Secretary of Finance and Economic Affairs, Government of India. This is an opinion and the views expressed above are the author’s own. The Quint Neither endorses nor is responsible for it.)
