Output Gap May Take Time To Close, Says RBI

Output gap means due to poor demand conditions, companies are unable run their plant at full installed capacity

Output Gap May Take Time To Close, Says RBI

RBI has admitted that credit growth in India is low

Admitting that credit growth is "very low" given the size and growth rate of the economy, the Reserve Bank of India (RBI) on Wednesday said for both the numbers to match, "the very very wide output gap" has to close.

The central bank also clarified that low credit growth does not necessarily mean low credit flow to the economy, or choking of credit to the system, as bank credit growth numbers that the central bank publishes regularly represent only the outstanding credit in the system.

Output gap means due to poor demand conditions, companies are unable run their plant at full installed capacity or, in a larger sense, an economy is not producing optimally as the demand is missing.

Addressing reporters at the post-policy presser, Deputy Governor Michael Patra admitted that credit demand is still missing in the economy.

It is certainly not good enough for an economy of India's size and scale, he said and apportioned it to "the very very wide output gap" in the economy that he feels "will take several years to close".

Governor Shaktikanta Das said the thriving commercial debt and credit market - commercial papers, non-convertible debentures (NCDs) and external commercial borrowings (ECBs) - and the massive deleveraging that large corporates have been undertaking with such credit, is the main reason for the low demand for bank credit.

Mr Patra, while admitting that credit demand is yet to reach the pre-pandemic levels, blamed it on the missing private investment and private demand which he said is due to the fact that corporates are still facing surplus capacity built over the years.

They will need fresh investment to augment capacity only when they saturate the existing capacity and when that happens, it will kickstart the much delayed private capital expenditure.

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