Opinion | RBI will Soon Re-Administer Rate Cut Medicine To Cure The Slowdown Viral

Come any Reserve Bank of India (RBI) monetary policy committee (MPC) review meeting, and the entire market looks at it for the outcome, in terms of easing of rates. The structural reform measures are not so much taken note of. It is like a thriller movie climax where the rate action is the crux and the other aspects are just details. This “rate action” is about the overnight repo rate, the rate at which banks borrow from RBI for one day, when they are short of funds. This rate is important because it gives a signal to the entire economy, somewhat like the red-amber-green at a traffic signal.

What happened on 5 December—all the six members of the MPC voting in favour of maintaining status quo on repo rate—has surprised everybody, the climax not being interesting. To put it in perspective, RBI’s forecast on inflation has gone up significantly from the earlier one. The MPC views the upward move in inflation as transient, but nonetheless it limits the scope for easing interest rates.


The important takeaway from this review meeting is that the policy stance and the communication tone in the post-policy media conference were clearly accommodative. Depending on evolving inflation and other relevant data, RBI’s MPC will ease rates going forward.

Most people prefer a lower repo rate, because it leads to lower borrowing rates at which you can take a housing loan or borrow to set up a business. When the growth rate of the economy slows down, which is the situation currently, the clamour for lower rates gets louder. The reason is that easier fund availability helps propel growth rate. The people who are not in favour of lower rates are savers and retired people, for whom the interest rate is a source of inflow. What we mentioned in the headline about RBI rate cut and the viral fever of slowdown is that though RBI has cut repo rate by 1.35% since February this year, it is not having the desired impact. Loan rates on the ground have not eased, in spite of the RBI easing the signal repo rate. The gross domestic product (GDP) growth rate remains soft, not showing any sign of revival anytime soon.

Where do we go from here? Given the challenge on growth, RBI is expected to maintain the accommodative stance. In other words, it will continue its preference for lower interest rates in the foreseeable future. However, RBI faces the challenge mentioned above. Any central bank has to walk the fine line of balancing between controlling inflation and promoting growth. Though inflation is broadly under control, from the perspective of RBI’s target of 4% CPI inflation, it has shot up recently. High food price inflation, driven by crops being damaged by excessive rains in some parts of the country, led to high inflation, the latest reading being 4.62%. It is expected that inflation pressure would recede in a few months, with the arrival of rabi crops. As much as RBI may like to promote growth through lower interest rates, it would maintain its accommodative stance. For bank lending rates on the ground, with credit off-take not being buoyant, hopefully, the lower rates will trickle down gradually.

The impact of today’s non-rate-action on your investment portfolio is not significant, as there is no major change in the market or investment fundamentals.

Going forward, rate cut hopes being alive, it is expected that yield levels on government securities and other securities in the bond market would ease. Consequently, borrowing costs of corporates would ease. This, in turn, would lead to better profitability, which in any case is being helped by the ₹1.45 trillion “corporate package” passed by the government. It would be conducive for equity investments as well, due to lower cost of funds.

Source: https://www.livemint.com/opinion/columns/opinion-rbi-will-soon-re-administer-rate-cut-medicine-to-cure-the-slowdown-viral-11575562214125.htm

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