THE GIST of Editorial for UPSC Exams : 08 August 2019 (RBI’s Goldilocks cut: On repo rate cut (The Hindu))

RBI’s Goldilocks cut: On repo rate cut (The Hindu)

Mains Paper 3: Economy
Prelims level : Repo rate
Mains level : Significace of the Repo rate cut process

Context

Faced with slowing GDP growth and encouraged by benign inflationary trends, the Reserve Bank of India (RBI) has delivered a Goldilocks cut of 35 basis points in the benchmark repo rate.
A rate cut was a foregone conclusion ahead of the monetary policy announcement, the expectation was of either a 25 or 50 basis points one.

Reason behind the rate cut

Given the extent of the slowdown in the economy, the Monetary Policy Committee (MPC) deemed the former as too low but taking into account factors such as the turbulence in the global financial markets and the rupee’s fall in the last few days, the latter was seen as too high.
The MPC settled on a median and unconventional 35 basis point cut, which keeps the powder dry for further cuts this financial year.
The RBI has cut rates in four consecutive policy announcements beginning February this year, aggregating to a total of 110 basis points.
But the transmission by banks to lenders has not been even a third of this.
The central bank says that banks have passed on just 29 basis points which is poor indeed.
One factor inhibiting transmission was the tight liquidity conditions until June when the RBI flooded the market in fact, the last two months the central bank has had to absorb excess liquidity floating around.
There is, therefore, reason to hope that transmission from hereon would be quicker.

Highlighting the growth projection

The repo rate at 5.40% is now at a nine-year low and is headed lower in the next few months and could well settle at 5% or very close to that by the time this rate cutting cycle plays out.
Supporting this theory is the fact that inflation is projected to be benign for the next one year.
Growth, on the other hand, is expected to be weak and the MPC has revised downwards the projected GDP growth rate for this fiscal to 6.9% from 7% earlier, with downside risks. Even this appears optimistic given the current impulses in the economy and it is very likely that GDP growth this fiscal will be closer to 6.5%.
With the latest cut, the RBI has signified that it is willing to do the heavy lifting.
But this alone will not suffice as cost of capital is just one aspect that determines investment. The government has to play its part too in boosting growth.

Conclusion

The space for fiscal concessions is limited given the overall revenue scenario, but the government can certainly push for further reforms to incentivise investment without impacting its fiscal arithmetic.
The slowdown now is part cyclical which can be addressed by a rate cut and part structural, for which reforms are an absolute necessity.
Therefore, unless the government responds with its own measures, the RBI’s efforts to support growth may go in vain.
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Prelims Questions:

Q.1) With reference to the SANKALP programme, consider the following statements:
1. It is implemented by Union Ministry of Human Resource Development with the assistance of World Bank.
2. Its objective is to implement the mandate of the National Skill Development Mission (NSDM).
Which of the statements given above is/are correct?
A. 1 only
B. 2 only
C. Both
D. None