Will RBI rate cut help consumer, business and govt?

In about an hour from now, the Reserve Bank of India will announce its first bi-monthly monetary policy statement for 2019-20. Economists expect that the first rate decision of 2019-20 will be such that cheers the street. A 25 basis point repo rate cut.

Even if it is true, how will it help the consumers, the businesses and ultimately the Modi government in winning the upcoming election?

Are the interest rates going to come down for the end consumers? A plain answer is no. The RBI under its new Governor Shaktikanta Das gave a repo cut in February. How many banks handed out the benefits to the consumers to date? Maximum four to five out of 21 public sector banks.

Transmission continues to be a problem. And, rate cut transmission is designed in such a way that even if the rate cut percolates down, only the new borrowers can benefit, not the existing ones. Floating loan rates are linked to the marginal cost of funding based lending rate.

Last time, the RBI cut the key policy rate and brought it 6.25%. That was in February. Since then the data shows headline retail inflation has risen to 2.57%. The expectations are that going forward, inflation will rise further. The seasonality factor will play out on vegetable and fruit prices and perk up food inflation. In summer, vegetables get costlier.

Pulses, which witnessed deflation till the end of last year, we're now witnessing double-digit inflation. Lower sowing area of rabi crop will have its impact going forward and that will fan inflation further. The crude petroleum and natural gas segment have also seen inflation quickening in February.

By that standard, the RBI should give a small pause considering that even if it cuts rate, the immediate benefit will not reach the government plunging into elections.

In February, RBI Deputy Governor Viral Acharya and external member Chetan Ghate had voted against the repo cut. A repeat of that is not ruled out this time around.

At this juncture, what most of the economists have suggested is that the RBI should take a couple of more steps to ease liquidity in the system. It has taken a few in the course of last two months. It needs to do more. The rupee-dollar swap auction to ease liquidity has got an overwhelming response.

It will be important to see whether the RBI decides to hold on rates or goes ahead with it to give economic growth a push.

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Will RBI rate cut help consumer, business and govt?

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