Sustained low inflation to cut cost of capital: RBI deputy governor

Ahead of the Reserve Bank of India (RBI)’s monetary policy review on September 29, Urjit Patel, the central bank’s deputy governor, Thursday said sustained low inflation would help cut the cost of capital. He expressed concern at banks’ rate cuts lagging cuts in policy rate by RBI.

“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 medium-to-long term inflation,” Patel said, while speaking at the India Economic Convention here.

Inflation has remained subdued for about a year. General wholesale prices declined 4.95 per cent in August, the most in decades. During the same month, retail prices rose at a nine-month low of 3.66 per cent.

Patel, who headed a committee that recommended a path to address inflation, said the fiscal deficit of the Centre and states played a role in the cost of capital, considering these entities were the largest borrowers. “The higher the cost of restructuring, the higher the cost of debt, the more it builds in the cost of capital from the side of the lender. That is something we are in middle of addressing,” he said.

He voiced concern that commercial banks had failed to pass recent cuts in RBI’s policy rate to borrowers. On the lag in transmission, he pointed out only a fifth to a quarter of bank deposits were re-priced in about 12 months. “That is an inherent lag in costing capital for banks, which then creates a lag downstream in terms of pricing of loans,” he said.

This financial year, India’s current account deficit would stand at 1.5 per cent of gross domestic product (GDP), Patel said. For the June quarter of FY16, the deficit had narrowed to 1.2 per cent of GDP.

On the new banking licences issued by RBI on Wednesday, Patel said the step was aimed at lowering the cost of capital. He added while a vibrant banking system was important to cut cost of capital, lower taxation would also be helpful.

"We announced licences for small finance bank with a focus on small borrowers. So, this addresses the niche requirement for 'Make in India', creating entrepreneurs and a million jobs a month," he said.