By Rasananda Panda & Prashanta Ch. Panda in  Ahmadabad,  , February 7, 2017 : With the budget for the FY 2017-2018 presented on February 1, all eyes now have move to the sixth bi-monthly credit policy to be announced by RBI on February 8.

The budget with big ticket announcements towards large scale public spending on infrastructure and social sectors has made a sincere attempt to boost the economy. The manufacturing sector has already slowed down to 5.4 percent. NIKKI Purchase Manager’s Index (PMI) for service sector is also showing the trend of sluggishness for this fiscal and thereby confirming that slow down of Indian economy at least till next two quarters of FY 17-18 is going to be there.

Only saviour at this point of time is the low rate of CPI inflation that hovers round 3.5 percent arising out of a good harvesting of khariff and likely rabi crop and demand slowdown because of demonetisation. A slowing economy with low inflation is not a matter to be cheered at least by the economists.

Given this backdrop, actions by Mint Street will be closely watched. If the data as released by RBI on Friday, 3rd February is an indicator, a cut in the policy rate cut by at least 25 to 50 basis point looks imminent. This is because of a slow growth in credit during last one year as against the growth in deposit during the same period. The total deposits stands at Rs 107 lakh crores where as the credit is to the tune of Rs 74 lakh crores as on 20th January, 2017. This huge gap of around Rs 30 lakh crores is not a good sign for an economy like India given the investment needs of the country. This gap also indicates the reluctance by the industry and corporate to put their money in the economy.

This trend of credit to deposit ratio looks alarming when compared with last year data. During March 25, 2016 to January, 20, 2017 while there is an increase in deposit by around Rs 13 lakh crores the credit growth is only Rs 1 lakh crores. This gap is definitely cannot be attributed to 50 days of demonetisation alone.

It is obvious that with ease in withdrawal from banks coming into place, the deposits may fall and therefore lays the action by RBI towards easing credit by reducing the policy rate. This in turn will make the fund cheaper for the corporate to put into their business.

At the same time, with this move banks will further reduce their deposit rates and enabling the common depositors withdrawing money look into other avenues of savings namely in the mutual fund and stock market as the case may be that are always going to give higher returns than the fixed deposits with the banks.

The number of IPOs (IRCTC, IRFC, BSE) that are underway is an indicators towards likely high returns expected from the capital market. The consumption demand may get the required boost towards kick-starting the economy that otherwise has slowed down.

In addition, the repo rate if reduced may encourage private spending which otherwise is stagnant since last four to six quarters. This action will compliment the government spending as envisaged in the Budget. In addition the prevailing low inflation rate here will act as a saviour to the industry and thus giving them the additional benefit from low cost of raw materials etc. helping them to improve their with growth in sales and revenue.

With the government abolishing FIPB (Foreign Investment Promotion Board) and measures towards encouraging foreign portfolio investments, it is natural to expect from RBI as to do extra by promoting foreign investment to the country.

The Federal Reserve Bank is all set to put its policy rate in 2017- a fact acknowledged by Finance Minister in his Budget Speech. Add to this, is the gradual movement of crude oil price in northward direction. Therefore, soon we act in this front it will bring immediate advantages to the country in the form of commitments to investment. Suffice to say that the falling current account deficit, control over fiscal and revenue deficit and above all low inflation with a stable rupee provides the necessary space to RBI on their move towards rate cut.

The Economic Survey 2016-17 like previous year’s survey has again harped on using the RBI’s equity to recapitalise the banks. It argued that after demonetisation, the windfall will boost the central bank’s finances. According to the Economic Survey, RBI had more than adequate equity i.e. it had the fourth largest equity as a percent of central bank balance sheet in the world. From this the RBI could easily return Rs. 4 lakh crores to the government to be deployed in some other ways.

The money could be used to recapitalise the otherwise ailing banks or to square off debt. In that case it sends the signal that the government is serious about a strong public sector fiscal position. Previous RBI Governor Raghuram Rajan was critical of the proposal. He was in favour of high equity for the stability of the central bank especially in the less than conducive global business environment and to allay fear of currency volatility. Mr. Urjit Patel has to factor in this aspect for while taking stand on forthcoming credit policy.

It is a foregone conclusion that RBI damaged its reputation with the series of flip-flops in communicating its stance on demonetisation. This credit policy, perhaps will make such statements towards emboldening the role of RBI in the coming days towards economic policymaking in the country and none the less reinforcing the position of its Governor – Mr. Patel at present.

The Authors are Faculty Members of Economics at MICA, Ahmedabad and Pandit Deendayal Petroleum University, Gandhinagar respectively.