New Delhi: RBI Deputy Governor K C Chakrabarty Wednesday conceded that monetary policy is partly responsible for not being able to contain inflation and arrest slowdown in growth.
While the interest rates are not the only reason for economic slowdown, inflation is "definitely" one of the reasons for the sluggish growth, Chakrabarty said on the sidelines of an Assocham event here.
"Slowdown in the growth is for a variety of reasons. Yes, to that extent monetary policy is not able to control the inflation and not effective, it is responsible. We cannot say something wrong happening in the economy, we are not responsible. Collectively, we are all responsible," he said.
Inflation has remained at around 8 percent for last several months, much above the comfort level of RBI and the government.
When asked whether 7 percent has become "new normal", he said, it has to be in sync with the global trend which was about 5 percent in 2011.
The economic growth has also been languishing. For the first quarter of the current fiscal declined to 5.5 percent. GDP growth moderated to 9-year low of 6.5 percent in 2011-12.
Asking banks not to shy away from giving loans to productive sectors, Chakrabarty said "when NPAs are high your risk management system has to be improved, your credit appraisal system has to be improved.
"Because of NPA fear, banks need not stop lending but banks must improve their credit management capability for which there is enough scope, he said, adding, banks need to pay more attention to the credit needs of agriculture, SME and retail," he said.
On the liquidity situation, the RBI Deputy Governor said, there is enough liquidity to take care of the lending activities of the banking system.
"I think liquidity is okay...Whatever is the liquidity, that is adequate and comfortable. This is always monitored," he said.
In order to ease liquidity situation, the Reserve Bank last month announced infusion of Rs 17,500 crore by reducing Cash Reserve Ratio (CRR) by 0.25 percent.
Accordingly, the CRR, or the portion of deposits banks have to park with the RBI, now stands at 4.25 percent, while the repo rate, at which RBI lends to the system, has been retained at 8 percent.
Referring to three issues hindering the economic growth, Chakrabarty said, "One is inflation, second is fiscal deficit and third the current account deficit."
Unless there is a very smooth macroeconomic environment, he said, it is not very conducive for growth.
He emphasised that a major role has to be played by the manufacturing sector, corporate sector in tackling these issues.
"Unless you use the technology, innovation in bring down the manufacturing cost to less than 1 percent, we will not be able to have inflation low and interest rate will not come down," he advised.
Asking lenders to give more attention to agriculture, SME retail, Chakrabarty said banks have to play an important role. No country can have sustainable growth unless SME contributes.
"We have to bring agricultural productivity if we have to grow. Then agricultural people have to shift to then manufacturing and we have to mechanise the agriculture," he said.
"Today corporate sector gets money at 10 percent, 11 percent, 12 percent, SMEs are getting money at 15 percent, 16 percent. Unless the SME sector is sustained no country will be able to build a manufacturing base," he added.