Global events to weigh on RBI credit policy review: ASSOCHAM

'It should not so happen that while we keep talking about the interest rates, the slippages in the quality of loans get further aggravated,' said ASSOCHAM's Secretary General

Fast changing geo-political situation in the Middle East and the increased terror threat with consequent economic costs will surely weigh on the RBI's policy stance which is not expected to give any more cut in the interest rates in the ensuing review, an ASSOCHAM paper has pointed out.

"Then the whole issue of Rupee stability in the backdrop of chances that US Fed may raise the interest rates, would influence the monetary policy and the industry must be prepared for the unfolding events," said The Associated Chambers of Commerce and Industry of India (ASSOCHAM) in a pre-policy note.

Conceding that RBI may not be able to go in for any further cut in the policy rates in the ensuing review, the ASSOCHAM has impressed on the central bank to ensure that transmission of the rate easing is done by the lenders within a set framework of guidelines.

While the Reserve Bank of India wants the banks to do much more and pass on the substantial easing of rates to the borrowers, the banks have not been showing the similar zeal citing different technical reasons and retained good part of the cut in the REPO rates.

"Given this background, RBI wants the banks to move to 'marginal cost' principle in fixing their lending rates. It is likely to notify the new guidelines to this effect. This should, over time, improve monetary policy transmission," the chamber said.

As for policy rates, it said no reduction is expected, "Given the 'front-loaded' rate cut in September 2015 and the incrementally modest transmission of past easing. Additionally, uncertainty related to the monsoon and efficacy of food management in 2016 and the impact of the impending pay revision for Government employees pose key risks to the achievement of the RBI's target of containing CPI inflation below 5 percent by Q4FY17."

Besides the interest rates, the main concern before the Indian economy at the macro level is an 'unsustainable proportion' of the non-performing assets and the loans under stress, which according to different estimates have reached up to 15 percent of the bank advances.

"It should not so happen that while we keep talking about the interest rates, the slippages in the quality of loans get further aggravated," ASSOCHAM Secretary General, D S Rawat said.

He said the RBI has already initiated a number of steps for easing of NPAs in the infrastructure sector a close monitoring is required along with the government to make sure that some of the projects in the highway sectors are brought back to the standard assets.

"In fact, there have some encouraging examples where with the banks showing some pragmatism, the projects have been restored to health generating a positive sentiment around the promoters, their stocks in the market and the commensurate investor confidence," the chamber stated.