Categories: B & C

A surprise cut in repo rate

By Dr DM Deshpande*

 

The new Governor RBI made a debut with a reduction in repo rate by 25 basis points; the new rate is 6.25 per cent. It was widely believed that the RBI would adopt a ‘do-nothing’ wait and watch policy. The surprise cut may have brought the Government and the MPC (Monetary Policy Committee) on the same page but it is extraordinary for the RBI to change stance rather quickly.

The report says that the RBI has now shifted gear to ‘neutral’ from it’s earlier position of ‘calibrated tightening’. What it means in lay man’s language is that the apex bank is now focused on growth rather than on curbing inflation. This is clear not just from the cut in repo rate but also other measures that have been announced.

It must be the data on inflation that has been a major driving force behind the change in stance by the RBI. As per the forecast for 2019-20, inflation is expected to be in the range of 3.2- 3.9 per  cent a shade lower than the targeted below four per cent at the higher end. But the inflation data, at best, presents a hazy picture. Food prices continue to be repressed; that is the reason why the headline inflation is down. Take away food and fuel from the list, inflation will shoot up to 5.6 per cent well above the target rate. Further, the RBI itself is surprised by the collapsing food prices. It has now decided to collect data from the grassroots level to identify and fix the problem.

Looking at the stress factor in NBFC’s, it has been made easier for them to borrow. Lending to farm activities too has been eased in view of the widespread agrarian distress. The foreign portfolio investors could now invest in corporate debt. The move would not only help companies boost their investments, but in a larger context, it will help develop a healthy bond market in India. This has been one major lacuna in our financial markets.

Some of the public sector banks have come out of the ‘stringent’ requirements under Prompt Corrective Action (PCA.) Other public sector banks are in the act of cleansing their balance sheets. In course of time more banks are likely to exit PCA. There is bound to be increased competition to attract and retain deposits. This will mean an upward bias in deposit rates. As a result banks would be reluctant to lower the lending rates which will mean sacrificing profits or taking a hit on margins. In any case, transmission mechanism is quite weak. Empirical evidence suggests that lower lending rates will kick in only with a time lag and very often not the entire benefit of the cut is transmitted to end borrowers.

The MPC reiterates the downside risks to growth-especially those emanating from overseas. The number of experts and analysts who are predicting recession like conditions in 2019-20 is growing. This is buttressed by the fact that commodity prices are on decline. Even oil price is suppressed and is not likely to rise anytime soon. This will affect our service sector. It will not benefit our exports either. Growth as predicted then comes up against a ceiling.

The Federal Reserve has given a reprieve. It is expected that global money will once again flow in the direction of emerging markets. But how big will India’s share be in that is a difficult guess as of now. With uncertainties of elections which are round the corner in next few months, foreign investors may well take a wait and watch approach. In such a scenario, there are greater chances of populist budget and rate cut will have less impact on growth but more impact on inflation.

It is instinctively assumed that rate cut will boost investment demand. Again empirical evidence suggests that the link between interest rate and investment demand may not be strong always. There could be various reasons why investment demand may not be picking up like there is already a surplus capacity, uncertainty and risks going in to future, unstable policy environment and the like. If the rate cut leads to more consumption demand, it will be counter productive. As it is credit is picking up mostly for retail and consumption purpose.

The rate cut has not been conclusively unanimous. Two members of MPC voted against while four including the Governor voted in favour. The rate reduction is done but not dusted yet; in fact the tone and the tenor of the report is a pointer that more cuts are in the offing, one more probably in April meeting itself. Hope wiser counsel will prevail; it would be better to look out how risks pan out-monsoons, trade wars, recession fears and election results.

*The writer is in the field of higher education- teaching, research and administration for nearly four decades. Presently he is the Vice Chancellor of ISBM University, Chattisgarh.

nt

Comments are closed.

Recent Posts

  • Goa News

EIA’s fish-testing lab will take a year to become operational

NT NETWORK Margao Fisheries Minister Vinod Palyekar Saturday said that the full-fledged laboratory, which is being set up at the…

8 hours ago
  • National News

PM asks states to focus on core competencies

PTI New Delhi Prime Minister Narendra Modi Saturday said the goal of making India a $5 trillion economy by 2024…

8 hours ago
  • Goa News

Petrol price in Goa now almost at par with other states

NT NETWORK Panaji Goa has come a long way from April 1, 2012, when the then chief minister, Manohar Parrikar,…

8 hours ago
  • Goa News

Sawant takes up sand mining, CRZ with Javadekar

NT NETWORK Panaji Chief Minister Pramod Sawant has brought to the notice of Union Minister of Environment, Forests and Climate…

8 hours ago
  • Goa News

‘Vayu’ delays monsoon arrival in Goa by 5 days

NT NETWORK Panaji The arrival of monsoon in Goa will be delayed by five more days due to the very…

8 hours ago
  • Goa News

CM draws PM’s attention to mining, Mhadei, Mopa

NT NETWORK Panaji During his address at the NITI Aayog meeting in New Delhi on Saturday, Chief Minister Pramod Sawant…

8 hours ago