RBI warns against farm loan waivers; holds repo rates

While protests by farmers continue to intensify across States, the RBI warned against the announcement of mega farm loan waivers.

Published: 08th June 2017 06:56 AM  |   Last Updated: 08th June 2017 07:00 AM   |  A+A-

By Express News Service

MUMBAI: While protests by farmers continue to intensify across States, the Reserve Bank of India (RBI) on Wednesday warned against the announcement of mega farm loan waivers. RBI Governor Urijit Patel cautioned about the deteriorating fiscal situation of States implementing such waivers.

The Central bank’s call for caution came after Maharashtra and Uttar Pradesh announced massive loan waiver packages that exceed `30,000 crore. In fact, according to a report by Bank of America Merrill Lynch, various State governments are expected to waive off loans worth `2.5 trillion in the run-up to the 2019 Lok Sabha elections.  

“Past episodes in our country had shown that when there are significant fiscal slippages, they do permeate to inflation sooner or later. So, it’s a path that we need to tread very carefully and before it gets out of hand,” the Governor warned. The risk of going down the slippery path of waivers could dissipate any important gains the State could have made in fiscal rectitude over the last 2-3 years, he said, adding that “unless State governments’ budgets allow that fiscal space to go in for a loan waiver, it would be a risky path to tread”.

Meanwhile, the Reserve Bank on Wednesday refused to tinker with repo rate, which stands at 6.25 per cent. The Monetary Policy Committee (MPC) voted 5-1 for the decision, the panel’s first split vote since its inception last September.  The committee lowered inflation projections drastically to 2-3.5 per cent for the first half of FY18 and 3.5-4.5 per cent in the second half. This means the risk of a rate hike has receded, strengthening chances of rate cut, but for now, the RBI wants to ‘wait and watch.’

Asserting its autonomy, the six-member MPC unanimously declined a meeting with government officials ahead of the policy review. As per reports, the Finance Ministry, represented by Chief Economic Advisor Arvind Subramanian and Principal Economic Advisor Sanjeev Sanyal, had scheduled interactions with MPC members on June, 1.

“The meeting did not take place. All MPC members declined the request of the Finance Ministry for that meeting,” Patel said.

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