Rate cut: RBI’s big gamble

The days of high inflation and high interest rates seem to be over. With the second 25 basis points cut in interest rates in two months, RBI Governor Shaktikanta Das seems to have set the ball rolling for a benign interest rate regime to push up consumption demand and negate, in part, the adverse impact of the looming global slowdown. Das seems to have played to the gallery, egging consumers and industry alike in sectors like automobiles, housing and commercial real estate to take advantage of low interest rates and trigger higher consumption in goods and services.

The repo rate has now been set at a modest 6% level. But the impact of lower rates will be felt only if banks transmit the rate cuts fully to their retail customers and extend lower cost of funds to existing borrowers as well. Having conceded that the repo rate cut announced in February has not been fully transmitted to retail consumers, the RBI’s decision to come up with fresh guidelines for banks needs to be monitored closely. In the meantime, banks have the leeway to tighten the belt, trim their own spread, cut corners and keep the retail credit demand high. At the same time, reduction in deposit rates, thereby lowering the yields for the retail saving community, may squeeze the liquidity for banks further. Simultaneously, finding ways to resume lending to ‘credit-worthy’ corporate customers may have to be explored. Due to government policy measures and the last cut in interest rates, homebuyers’ sentiment seems to be upbeat, with a 12% increase in housing sales across seven cities in the last three months. However, tepid sales in two-wheelers and less than optimistic automobile numbers in the same period do not indicate demand revival in the sector. Keeping the retail loans tap open is the only way forward.

At the macro level, the effect of El Nino on the monsoon, the outcome of the Lok Sabha elections, the focus of the next budget to be presented by the new government and oil prices that touched $70 per a barrel will determine economic growth prospects. Rightly, the RBI seems to have factored in these variables while trimming GDP growth forecast to 7.2% from the earlier 7.4%. The US, seemingly headed for recession, possibly leading to another ‘Great Depression’, is a cause of concern for India. However, the RBI retaining the fiscal deficit target at 3.4% and inflation at over 4% are redeeming factors that may work positively for the economy. Post-June, the RBI may turn cautious on rate cuts. Instead, it may prefer time-tested liquidity adjustment facility, open market operations and foreign exchange swaps to boost liquidity and improve credit offtake.

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Rate cut: RBI’s big gamble

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