oppn parties MPC: Rate Cuts Are Fine, But The Need Is For Government Measures To Boost Consumption

News Snippets

  • In a first, the Supreme Court recognizes marital rape, although for the limited purpose of allowing married women the right of abortion up to 24 weeks if they conceived as a result of forced sex by their husbands
  • Air India cuts discounts on base fare to students and senior citizens from 50% to 25%
  • Mallikarjun Kharge and Digvijay Singh are being touted as frontrunners to take on Shashi Tharoor in the elections for the post of Congress president
  • Sonia Gandhi will decide who will be Rajasthan CM if she feels there is a need to change guard after the near-rebellion by MLAs in the state
  • Ashok Gehlot bowed out of the race for being Congress president after meeting Sonia Gandhi
  • India has moved to the 40th spot in the innovation index, up 6 spots from last year
  • DGGI has alleged that top insurance companies, banks and NBFCs has committed a fraud of Rs 800cr by claiming input tax credit without underlying supplies
  • The Centre will borrow Rs 10000cr less than planned earlier due to good revenue collections
  • At $23.9bn, India's current account deficit widened to 2.8% in Q1, the worst in four years
  • Stocks continue to flounder on Thursday: Sensex sheds 188 points to 56409 and Nifty 40 points to 16818
  • The 36th National Games were declared open on Thusrday by PM Modi in front of a record crowd in Motera near Ahmedabad
  • Jasprit Bumrah most likely to miss T20 World Cup due to recurrence of back injury
  • PFI's political wing, the SDPI is on EC radar and action will follow soon if discrepancies are detected
  • Ashok Gehlot to meet Sonia Gandhi today, says all issues will be sorted out soon
  • Referring to the PFI ban, most Muslim organizations ask the government to take similar action against right wings organizations like the RSS, Bajrang Dal, VHP and the like
In a landmark order, Supreme Court rules that all women, married or unmarried, are entitled to safe and legal abortion up to 24 weeks of pregnancy as per the MTP Act
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MPC: Rate Cuts Are Fine, But The Need Is For Government Measures To Boost Consumption

By Ashwini Agarwal

The Monetary Policy Committee (MPC) of the RBI lowered the repo rate by 35bps this time, taking it to 5.9 percent. This makes it the lowest in 9 years. The market was expecting a cut but the figure was a surprise. For the last several months, the MPC has been lowering the rate by 25bps. It is reported that while some members felt that 50bps would be too much, others felt that the standard 25bps would be low given that credit off-take was not improving. Hence, the middle rate of 35bps was arrived at. The stance remains accommodative as inflation is under control. The MPC expects it to remain benign for the next 12 months.

From the start of this rate-cut cycle, the MPC has cut the repo rate by 110 bps now. Before the present cut, out of the total reduction of 75bps, banks had transmitted only 29bps to the consumer. This was mainly due to the fact that the banks are paying a higher rate of interest on the fixed deposits lying with them. But since most of these deposits are short term, it is expected that the transmission will be bigger henceforth as new deposits will be taken at current rates. The RBI has also tweaked the norm of banks lending to NBFCs. Hitherto, banks could lend only 15% of their Tier-1 capital to a single NBFC. This has now been increased to 20%. This is likely to increase credit flow to NBFCs and reduce their liquidity crunch. This, in turn, will help them lend more, especially to the rapidly growing fintech sector.

But there are no takers for funds in these depressing conditions at even lower rates of interest. Almost two lakh crore of excess liquidity in the banking system had to be absorbed by the RBI. The money market rate has been lower than the repo rate for the last two months. During the time the banks have reduced lending rates by 29bps, the weighted average money market rate has come down by 78 bps and the 10-yr g-sec yield by 102 bps, as per The Economic Times. That is the main reason that there are no takers for bank loans. The other big reason is that in the present market condition, investors and entrepreneurs have little incentive to go for new projects as there is simply little or no demand for products.

Hence, rate cuts alone will not induce fresh investments from corporates. Most of them have reported below-average earnings for the last few quarters, signaling a downtrend. In such a scenario, they are unlikely to commit funds for either expansion or new projects. The government will have to take measures to boost consumption. That can only happen if people have money in their hands. Hence, the government will have to kick-start the economy by investments in infrastructure projects, either alone or in PPP mode. It will also have to initiate reforms that will aid growth.