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

News Snippets

  • India's sovereign green bonds were oversubscribed four times as the RBI received 266 bids worth Rs 32892cr agaisnt the target of Rs 8000cr
  • Google tweaks its Android and India app store policy to allow manufacturers and users to choose certain things instead of compulsorily using Google apps after the CCI order and fine for unfairly dominating the market
  • Former US secretary of state calls former Indian external affairs minister Sushma Swaraj a "goofback" and a "hinterland political hack". MEA S Jaishankar slams him
  • Jamia screening of BBC documentary on Gujarat riots cancelled after the university was turned into a fortress and later 13 students were detained by the police
  • Supreme Court grants conditional interim bail for eight weeks to Lakhimpur Kheri accused Ashish Mishra. The bail can be further extended based on his conduct. He was asked to stay outside Delhi-NCR and UP and surrender his passport
  • After the JNU administration tried to thwart the students from screening the BBC documentary on the Gujarat riots and PM Modi, now students of Presidency and Jadavpur universities in Kolkata have decided to screen it 5 times next week
  • While a US research frim Hindenburg says its analysis found the Adani group overleveraged and claimed that its bubble will burst very soon and that sent the price of group companies crashing (Adani companies lost a combined Rs 55000cr), Adani group said the report was 'baseless' and 'malicious'
  • This time Enforcement Directorate arrests TMC spokesperson Saket Gokhale under PMLA for money laundering
  • Padma awards announced on Republic Day: Mulayam Singh Yadav, architect Balkrishna Doshi and ORS pioneer Dilip Mahalanobis get Padma Bibhushan posthumously, Padma Bhushan ius awarded to Kumar Mangalam Birla and 8 others and 91 get Padma Shri
  • Stocks fall big time on Wednesday on F&O expiry, finalncial and banks take big hit: Sensex tumbles 773 points to 60205 and Nifty 226 points to 17892 even as the market volatility meter shoots up by 8.51%
  • World Cup hockey: Germany stun England 4-3 to reach semifinals; Netherlands beat Korea 5-1 to enter last four
  • Australian Open: Sania Mirza and Rohan Bopanna reach the finals
  • Suryakumar Yadav is named ICC Cricketer of the Year 2022 and Renuka Singh gets the ICC Emerging Cricketer of the Year 2022 award
  • BCCI gets a whopping Rs 4670cr in the auctions for the 5 teams in WIPL or as it will be known now, WPL. Adani Sportline gets Ahmedabad for Rs 1289cr while Mumbai Indians get Mumbai for 913cr
  • Calcutta HC overturns the hookah bar ban in Kolkata by saying that it is not an illegal trade
India Commentary Wishes A Happy Republic Day To All Its Readers /////// India Commentary Wishes A Happy Basant Panchami And Saraswati Puja To All Its Readers
oppn parties
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.