Nirmala pitches for 2% rate cut

It helps small and medium enterprises, create jobs

Even before the new Reserve Bank of India Governor Urijit Patel takes over, Commerce and Industry Minister Nirmala Sitharaman has raised the pitch for an interest rate cut of at least 200 basis points to help small and medium industries.

100 basis points (bps) is equal to 1 percentage point. “2% interest rate cut is necessary to help SMEs, create jobs…The world over interest rate is low,” she said in her tweets.

The minister was replying to bitter tweets directed to her saying she is not in tune with the mood of common people and that’s why she is talking of such a whopping rate cut.

The criticism against a big rate cut is that the move will impact fixed deposits in the banks. Banks only borrow a small portion of money from the RBI on which they pay the repo rate as interest. A major portion of the money that they lend is borrowed in the form of fixed deposits.

A fall lending rates by 200 basis points will impact the fixed deposit interest rates by as much. Analysts say that if banks cut fixed deposit rates by such a huge amount, most of the money will move to other safe havens than financial instruments and post offices. In India, fixed deposits are an important form of saving and forms regular income for retirees.

“Have you suggested 2% cut in repo rate? Are you aware how will it affect the rate of interest on FDs?... Since you will probably never contest a direct election in your life, you are not really in tune with the mood of common people,” said a tweet on the minister’s twitter handle.

The next RBI policy review is on October 4, and the Governor-designate of RBI is seen as an inflation hawk.