Stressed assets, miles to go...

The Indian-economy is doing well when we see growth in terms of the unemployment rate (4.9%) which is the reason for an overheating economy because low labour supply has made wages rise in a consistent way with the rate of growth i.e. growth has increased demand but strings on investment including slow interest rate cuts by the RBI has made the cycle somewhat downbeat and slow in terms of investment and expenditure by the public-sector is seen as a tool to crowd in private investment. The stress on the commercial banks’ balance sheets due to stressed assets is another factor that has contributed to only half of the interest rate transmission in the market rates. However, the RBI is now using MCLR in deciding the lending rates and expanding the bank licenses to increase competition, but the stress on the banking is now a wholesome around several Lakh Crore Rupees of which the government would be able to contribute in Thounsand Crores this year. The loss of banking is a debt gone bad after a boom and is restraining the profitability of the banks by constraining lending during low growth. Liquidity in the domestic economy has also constrained the interest rate transmission because of bad loans and fewer funds for credit creation. Nonetheless our RBI governor has made standout that the RBI wants a liquidity neutral position and has done liquidity improvement through OMOs and other levers. The government and the RBI might try to incentivize the sectors that contribute to low prices and wage demand because that would increase cost and reduce investment by delaying rate cuts and loose competitiveness. But to increase domestic demand the policy makers may try to increase real wages and income to increase demand and growth by reducing the price level by more investment and supply in the economy by improving liquidity. More liquidity in the economy would make the commercial banks lend in large scale by lowering the lending rates. Keynes said that nominal wages and prices are sticky at low levels, but lower price rigidity is not supported by the evidences. In the Western World increased liquidity and lower interest rates have improved the supply and reduced the price-level in the long-run. Lower price expectation and increased real wage and income expectations could increase spending, consumption and investment, both. And, GROWTH…  This is our Governor’s last policy during this term but we still expect that the RBI could increase liquidity and increase interest rate cut transmissions when the public sector banks are constrained of capital.