oppn parties With Inflation in Check, Rate Cut Was Expected

News Snippets

  • ED issues 8th summons to Delhi CM Arvind Kejriwal in the excise policy scam case
  • Prime Minister Modi introduced the three IAF group captains - Prashanth Nai, Ajit Kirshnan and Angad Pratap - and Wing Commander Shubhangshu Shukla, who have been shortlisted for the first manned space mission of ISRO
  • Centre appointed former SC judge A M Khanwilkar as the new Lokpal. It also named three judicial and three non-judicial members of the Lokpal panel
  • A 9-judge Supreme Court bench started hearings on whether states are entitled to tax mineral-rich land in their respective states
  • Taking note of the huge disparity in charges in government and private hospitals for most treatment procedures, the Supreme Court asked the Centre to strictly enforce the CGHS rates or warned that the court would have to step in
  • Calcutta HC ruled that regardless of a woman employee being regualr or on contract and whether her contract permitted maternity leave, employers cannot deny childbirth and maternity leave to any women employee as it 'seeks to create a class within a class which is not permissible'
  • Sebi asks MF companies to disclose more risks associated with their small and mid cap funds
  • Vodafone Idea board approves Rs 45000cr funding infusion
  • NCLT clears Hinduja acquisition of Reliance Capital at Rs 9650cr upfront payment within 90 days of approval of resolution plan
  • Stocks returned to winning ways on Tuesday: Sensex gained 305 points to 73095 and Nifty 76 points to 22198
  • Commonwealth Chess championships: Mitrabha Guha wins title by scoring 7.5 points in 9 rounds
  • WPL: RCB beat Gujarat Giants by 8 wickets
  • Bengal starts paying MNREGA workers out of own funds as Central disbursement is stopped due to alleged 'discrepancies' in accounts
  • ISC chemistry paper postponed to March 21 just hours before start of exam due to "unforeseen circumstances"
  • Ghajal legend Pankaj Udhas passes away. he was 72
Cross-voting in Rajya Sabha elections enables BJP to snatch seats in UP & Himachal /////// Congress government in Himachal in trouble as some MLAs revolt
oppn parties
With Inflation in Check, Rate Cut Was Expected

By Sunil Garodia
First publised on 2016-10-05 13:25:52

About the Author

Sunil Garodia Editor-in-Chief of indiacommentary.com. Current Affairs analyst and political commentator.
The interest rate cut by 25 basis points by the Monetary Policy Committee (MPC) in its first such decision is not surprising. There were enough indications and indicators pointing to this. When Urijit Patel spoke to the media for the first time after taking over as the RBI chief a few days ago, it was evident that he was more amenable to a rate cut that his predecessor. People said he was dovish. But they forgot that since Patel was the one who had recommended a rate policy based on inflation, he could not abandon the same.

If the MCP that he heads could lower the rates it was only because inflation targets were under control. It was also because near term outlook was also positive. It seems that for now, the negative pressure of rising inflation is over. The government has done enough to cool the price of pulses and has taken long term corrective measures in this regard. Further, with above average rainfall in nearly 85 percent of the country, kharif crop is expected to be at record levels. This will ease farm prices and is expected to keep food inflation at bay.

Given this background, the unanimous decision of the MCP to cut the rates by 25 basis points to bring it to its lowest level in six years is neither a gamble nor a bold step. It is something that needed to be done and has been done by the six wise men in the MCP. It now remains to be seen whether the rate cut spurs domestic investment or not. Given that demand for goods and services is sluggish (although it is expected to be high in the festival months due to the twin effect of 7th Pay Commission handouts and payment of bonus in most parts of the country and thereafter will be driven by higher rural demand on the back of money in hands of farmers due to good crop) and exports are not picking up, the rate cut alone will not bring in investments.

It also remains to be seen whether floundering PSU banks pass on the advantage to the consumer, leading to a fall in EMIs. The RBI has asked them to do so immediately. But in the past, banks have been reluctant to do so. Another area of concern is increasing costs of other products and services in the household basket. Even if food and fuel remain inflation negative, the cost of education, healthcare and leisure is expected to continue rising. This may have an adverse effect on the net inflation rate. But since current inflation is in check and the near term outlook is not alarming, lowering interest rate was required to boost domestic investment. This now needs to be supplemented by the government in the form of other financial reforms that will make the economy competitive.