THE GIST of Editorial for UPSC Exams : 07 JUNE 2019 (No surprises: on RBI's repo rate cut (The Hindu))

No surprises: on RBI's repo rate cut (The Hindu)

Mains Paper 3: Economy
Prelims level: Repo rate
Mains level: Reasons behind RBI's repo rate cut

Context

• There were no surprises in the second bimonthly monetary policy announcement by the Reserve Bank of India.
• A 25 basis point (0.25 percentage point) cut was widely expected, and the RBI delivered that.
• Whether a deeper 50 basis point cut was necessary, given the sharp slowdown in the economy, is now a purely scholastic question.
• With inflation well under the benchmark figure of 4%, the stage was probably set for the RBI to spring a surprise but it chose to play conservative.

Reasons behind rate cut

• Maybe the idea is to keep the powder dry for a further rate cut, if needed, in the next policy.
• If the economy fails to recover well enough from its slumber by August, the onus will, after all, shift back to the RBI. That said, there is enough in the latest policy to indicate that the RBI’s focus is now on growth.
• The change of stance to ‘accommodative’ from ‘neutral’, the statements by RBI Governor Shaktikanta Das at the press conference that ensuring systemic liquidity will remain a priority for the central bank, and the setting up of an internal working group to review the existing liquidity management framework.
• All clearly point to a central bank that is not only listening to the demands of the key stakeholders in the economy, but also acting on them.
• The one area where the RBI has some work to do is in the transmission of rates.
• By its own admission, only 21 of the cumulative 50 basis points rate cut effected by the RBI in the February and April policies has been passed on to borrowers by banks.
• The excuse from banks, at least in the last few months, was that liquidity was tight and so deposit rates could not be cut.
• However, liquidity has considerably improved in the last week, and more so with the new government loosening the purse strings.

RTGS/NEFT transactions charges

• There cannot be any more excuses from banks to not pass on the cuts fully.
• The RBI’s decision to do away with its charges on RTGS/ NEFT (Real Time Gross Settlement System/ National Electronic Funds Transfer) transactions is welcome provided it can, again, ensure that banks pass on the benefit to customers.
• The central bank has also proposed measures such as a reduction in the leverage ratio under Basel norms for banks, which will increase their lendable resources.
• The projected growth rate for this fiscal has been lowered to 7% from the 7.2% projected in April, and the first-half growth is estimated at 6.4-6.7%, which by itself appears ambitious given the current trends in the economy.

Conclusion

• With the RBI having done its bit, the focus shifts to the Finance Ministry.
• There are tremendous expectations from the government over the next round of reforms, backed as it is by a strong mandate.
• The onus is now on the budget, to be presented on July 5, to unleash the animal spirits again in the economy.

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Prelims Questions:

Q.1) Recently the term ‘The Asian Enigma’ was in news, consider the following statements with reference to the effects of Asian Enigma.
1. It increases the balance of payments of a country.
2. The fiscal deficit and core inflation both increase.
3. It increases the extent of malnutrition in a country.

Which of the statements given above is/are correct?
a) 1 only
b) 3 only
c) 1 and 2 only
d) All of the above

Answer: B
Mains Questions:
Q.1) What are the major implications behind the rate cut of just 25 basis points ?