RBI rate cut: Its governments turn to make a move The long wait is finally over. Last week, the RBI cut interest rates for the first time in nearly two years. The unexpected move ahead of the scheduled monetary policy announcement has been cheered up by the Indian industry. Burdened with high interest rates, the industry was eagerly waiting for such a step, particularly with industrial production struggling to pick up its pace. The RBI governor has said that the decision is based on easing inflation pressure, driven by fall in prices of vegetables and global crude oil prices as well as on the reiteration of the Centre of its commitment to adhering to its fiscal deficit target. Recently, the finance minister publicly criticized the RBI for sticking to a tight monetary policy, terming it as the singular factor responsible for the manufacturing slowdown. With the rate cut, the ball is now in the governments court. The biggest question is — will the RBI rate cut be transmitted to the lending rate cut by banks? The repo rate is the rate at which the RBI lends to the commercial banks and therefore it is very likely that the lending rates would come down sooner or later. In fact, some state-run banks have already reduced their lending rates, while some others have indicated that they would follow suit. This week several lenders are scheduled to hold meetings to review their lending rate. What is more important is that the rate cut, the first since May 2013, may signal the start of a downward cycle in interest rates. In his statement on the monetary policy, Rajan has hinted that subsequent policy actions will be consistent with the changed stance. Some economists even predict a rate cut by 75 basis points in the rest of the year. Such forecasts sound logical, but a lot will depend on the governments effort towards pushing growth. High interest rates and difficulty in doing business are two big enemies of investment and now with the first issue being addressed to some extent, the Centre should do its best to take care of the second. The forthcoming Budget should include strong measures to improve the business environment. Serious thoughts must be given to increase investment on our poor infrastructure and remove the supply side bottlenecks. In particular, availability of inputs like power, land and minerals must be ensured. At the same time, quality fiscal consolidation is also required. I invite your opinions.
Posted on: Thu, 22 Jan 2015 05:06:52 +0000
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