RBI may cut GDP growth estimate and may come out with strong provisioning to reduce NPAs

The next monetary policy revision of the RBI is scheduled on 20th of this month and it will be the first one after Rahuram Rajan assumed office.

The new Governor has enough reasons to make his first policy declaration an important one.  Amidst the present environment, he has to make few important steps including that one on growing NPAs with the banks.

NPAs of banks crossed 12 percent, which is alarming and it may go further given the present weak economic growth prospects. Rising NPAs is always against the RBI’s financial stability objective. At present, the central bank has sound provisioning norms to minimize the impact of NPAs on the banking system’s financial health. So, increasing the provisioning coverage ratio on various types of asset quality is the desirable step for the RBI.

There are other issues as well; like the after effects of the expected tapering launch by the Fed by 18th of this month. Based on the extent of tapering, Dr Rajan can take equivalent counter measures to stabilize the rupee.

The RBI may launch some preemptive counter measures to contain inflation which is expected from the pass through effect of the depreciated rupee. The exchange rate pass through of depreciation means imported products becomes costlier, leading to inflation. Definitely, Dr Rajan should make his first monetary policy tough on the price front by making the interest rate hard. A repo increase by 25 basis point is the expected medicine.

On the growth front, the RBI is very conservative traditionally. Few days back, the PMEAC has downwardly revised the expected growth rate to 5.3 per cent which is lower than the present RBI estimate of 5.5 percent. In the background of present negative developments globally, RBI may also revise it downwardly. 

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