Assocham welcome the Reserve Bank of India’s decision to change the Repo Rate by 25 basis points to 6% in today’s first bi-monthly policy review.
The Monetary Policy Committee (MPC) reduced the repo rate (or the rate at which banks borrow from RBI) to 6 percent from 6.25 percent earlier. Consequently, the reverse repo rate and marginal standing facility rate were adjusted to 5.75 percent and 6.25 percent, respectively.
The current rate cut resulting in overall reduction of 50 basis points since February 2019, would definitely boost the economic activities as the widening gap between inflation and borrowing costs was hurting companies’ balance sheets.
The repo rate cut would certainly influence many benchmark rates and in turn, reduce the actual borrowing cost for the first time (new) retail, MSME and corporate borrowers. The RBI has done its part by slashing the repo rates. The onus is now on the banks to concurrently reduce and pass it on further to consumers.
However, in the absence of a liquidity measure such as a reduction in cash reserve ratio (CRR), it may be difficult for the lenders to pass on the entire benefit of the policy rate cut to borrowers. Cash Reserve Ratio is a certain percentage of bank deposits which banks are required to keep with RBI in the form of reserves or balances. CRR is at 4 percent currently.
A 25 bps cut is good for infusing further liquidity in the system and it will encourage consumption, which is a positive sign. The rate cut also means that inflation is lower than anticipated and is pegged to reduce in the near future too which is again good for consumers.
The MPC headed by RBI Governor Shaktikanta Das has also put forth that the inflation is expected to move up from its recent lows as the favourable base effects dissipate but is expected to remain below the target of 4 percent. It expects inflation to increase gradually to 3.8 percent by the end of current financial year. For FY21, the RBI expects inflation to move in the range of 3.8-4.1 percent.
GDP growth for 2019-20 is projected at 7.2 percent, in the range of 6.8 – 7.1 percent in H1FY20 and 7.3 – 7.4 percent in H2 with risks evenly balanced. Though, the global scenario may impact the domestic investment activities as there are some signs of slowdown in manufacturing and imports of capital goods.
Hoping that the RBI continues to be considerate towards the industry and economy at large in the future as well.
– B.K. Goenka, President, Assocham