No surprises: on RBI's repo rate cut
Mains Paper 3: Economy
Prelims level: Repo rate
Mains level: Reasons behind RBI's repo rate cut
- 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
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
- 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
- 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
- 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
- The central bank has also proposed measures such as a reduction in the
leverage ratio under Basel norms for banks, which will increase their
- 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
- With the RBI having done its bit, the focus shifts to the Finance
- 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.
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
Q.1) What are the major implications behind the rate cut of just 25 basis points