Moderate expectations: On RBI rate cut (The Hindu)

Mains Paper 3: Economy
Prelims level: Repo rate
Mains level: Highlights of the repo rate cut

Context

• The unconventional 35 basis points cut in interest rates in August, the Reserve Bank of India (RBI) returned to a normal 25 basis points cut on Friday.
• While a rate cut was a foregone conclusion, the speculation was over whether it would be 25 or 40 basis points, going by the August experience.
• With this, the central bank has pruned rates by 135 basis points in just seven months since the rate cut cycle started in February.
• Of this, until August, banks had passed on 29 basis points to borrowers. But with the shift to an external benchmark by major banks recently — mostly linked to the repo rate — the transmission could be quicker from here onwards.

Predictions made by RBI

• The RBI has also sharply marked down the GDP growth projections for the current fiscal to 6.1% from the 6.9% that it had projected in the August policy.
• This was inevitable after the shocking 5% growth reported in the first quarter but it could be argued though that even the revised estimate is a trifle optimistic.
• If the projection of 6.1% for 2019-20 is to be met, the economy has to grow by about 7% in the second half which does not look very likely.
• If the high frequency data of the last couple of months are any indication, the second quarter may well end up mirroring the first in terms of GDP growth.
• The basis for RBI’s optimism, therefore, appears unclear at this moment.

Targeting inflation in control

• The central bank has done the heavy lifting in the last few months and monetary policy may well be nearing its limits in so far as its ability to influence growth prospects is concerned.
• Inflation is well within the target giving space to the RBI to focus on growth. Crude oil prices are back in the comfort zone, retreating from the spike in mid-September, and food prices are projected to remain soft on the back of a good monsoon.
• The monetary policy statement is unambiguous that the RBI will continue with its accommodative stance “as long as it is necessary to revive growth”.
• While this statement is credible, the problem is that the central bank can only facilitate lower rates and push banks to lend.
• It cannot force borrowers to borrow and this is evident from the soft trends in credit offtake in the last few months.
• Data shows bank credit is growing at just 10.3%.
• The government has been engaging the levers, and the corporate tax cut last month is a major move to get private investment going.
• However, the ₹1.45 lakh crore giveaway has set off fears in the market of a fiscal slippage and higher borrowings by the government.

Conclusion

• These concerns also explain the unenthusiastic response of the stock and bond markets to Friday’s rate cut.
• The ongoing festival season consumption holds the key to revival of the economy this fiscal.

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Prelims Questions:

Q.1) With reference to the Directive Principles of State Policy consider the following statements:
1. They embody the concept of a welfare state.
2. They are justiciable in nature as the fundamental rights.

Select the correct answer using the code given below
(a) 1 only
(b) 2 only
(c) Both 1 and 2
(d) Neither 1 nor 2

Answer: A
Mains Questions:
Q.1) How RBI’s rate cut is significant for increasing the investment?