RBI lets down again

The Reserve Bank of India (RBI) has disappointed one and all. Contrary to wide expectations that it would soften the interest rates, the RBI Wednesday kept the rates unchanged for the second time in a row awaiting more clarity on inflationary trends and impact of demonetisation on growth.

With inflation controlled and growth slowing down, one expected that the RBI would cut the policy rate by a minimum of 25 bps. The repo rate has been retained at 6.25 per cent. The decision to hold rates would mean people would have to wait longer to get cheap loans to buy houses or major consumer durables.

Coming amid gloomy atmospherics caused by the demonetisation, stuttering growth numbers as vouchsafed by the economic review, the least that the common men expected from RBI was a 25 basis point cut in the repo rate (one basis point is one hundredth of a percentage point).

Barring the announcement that the withdrawal limits will be raised to `50,000 from February 20 and the limits will be completely done way with from March 13, 2017, the sixth monetary review of the outgoing fiscal was a tame affair.

The stock markets reacted negatively to the announcement with a sharp plunge in the Sensex within minutes of the policy announcement amid a heavy pounding of bank stocks. A quick recovery saw the index trimming its losses at 45 points.

All six members of the Monetary Policy Committee (MPC) agreed to maintain status quo in the policy rates. The panel had cut interest rate by 0.25 per cent in its maiden meeting but held on to rates in December and again Wednesday despite fervent calls for a reduction in rates to boost lending.

A rate cut was needed to revive demand hit by the cash crunch post demonetisation. The panel sought time until it finds some more comforting triggers. The committee wanted to see the headline inflation coming closer to 4 per cent on a durable basis and in a calibrated manner.

This requires a further decline in inflation expectations, especially since the services component of inflation that is sensitive to wage movements has been sticky,” said its policy statement. The RBI flagged three significant upside risks to the movement of headline inflation: Hardening profile of international crude prices; volatility in the exchange rate on account of global financial market condition, which could impact upside pressure to domestic inflation and the fuller effects of the house rent allowances under the 7th Central Pay Commission award which have not been factored in the baseline inflation path.

The growth momentum in the country has slowed down. People tend to wait for some more time when it comes to spending big following the note ban. The private investment climate in the country, barring a few select sectors such as e-commerce, retail and partly telecom, are down in the dumps.

India Inc had bargained for a rate cut to kick-start an acceleration in economic activities. It is granted that home loan rates at present are at one of their lowest levels. Yet, a rate cut would have benefited the real estate sector by stoking demand.

Banks were likely to share the additional easing with home loan borrowers. It was all the more necessary as the RBI has predicted a downturn in growth numbers at 6.9 per cent even though it has pegged the forecast for the coming fiscal at 7.4 per cent.

The country is going through a difficult patch courtesy demonetisation. Hiring has come down. Companies across sectors are downsizing their workforce anticipating a prolonged play of the slump. In such trying times, people looked to the central bank to ease rates to pep up investment climate and increase household spending.

Lately, there has been a sharp easing in lending rates, especially after banks migrated to the Marginal Cost-based Lending Rates (MCLR) system coupled with heavy inflows of deposits following demonetisation. However, there is still a lot of elbow room with the banks.

As opposed to 175 basis point (1.75 per cent) rate cut in repo rate over the past two years, the average bank lending rates have come down by 85-95 basis points. Banks can still bring down the interest rates as the demand climate in the country is still frigid.

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