RBI Governor Shaktikanta Das (file image)
There are signs that consumption demand is making a strong comeback, Reserve Bank of India (RBI) Governor Shaktikanta Das said on November 16.
The recent cut in excise duty and value added tax by states will augment purchasing power of people, the Governor said.
“This would encourage firms to expand capacity and boost employment and investment amidst congenial financial conditions,” Das said while speaking at the SBI Banking and Economics Conclave on Tuesday.
“Are we at the cusp of a virtuous feedback loop where increased demand impulses will move in lockstep with commensurate supply response and ensure sustained growth of the economy? There are reasons to be optimistic on this front,” Das said.
Banks in particular should be investment ready when the investment cycle revives. Das said, adding there is an important role for public sector.
Current trend of investment led recovery can get a further boost if public expenditure plays a major role, Das said.
Noting that some fiscally prudent states with low debt-to-GDP ratio is hesitating to spend to their full potential, Das said, adding fiscally strong states could lead the expenditure drive.
Das said it was necessary to give targeted liquidity support to the financial system hit by the pandemic.
Financial system needed excess liquidity, Das said. However, the central bank needed to gradually unwind the excess liquidity, Das said. “Now, if you see the last monetary policy statements, we are now moving towards a rebalancing of the liquidity,” said Das.
“Let me make it very clear there will be always adequate liquidity but slowly want to rebalance the economy,” said Das.
RBI taking closer look at banks
Das said banks should ensure that their business models and business strategies are conscious choices, following a robust strategic discussion in the Board, instead of being driven by mechanical ‘follow the market’ approach.
“In their endeavour to grow, banks should avoid herd mentality and look for differentiated business strategies. At the RBI, we have started taking a closer look on the business models and strategies of banks,” Das said.
Certain banks had followed the high risk and high return business strategy, with a skewed priority for serving only the interest of their investors, Das said.
“The active role of the Board, especially in challenging the proposals of the management, thus becomes critical. This will contribute towards a more diligent and balanced approach to decision making,” said Das added.
