oppn parties There is Logic Behind RBI's Rate Cut

News Snippets

  • EMI's set to rise after the RBI hikes key policy rate
  • Calcutta HC says that the right to privacy does not end with the death of a person
  • Supreme Court says that a delayed order of preventive detention makes it invalid
  • Shashi Tharoor posts an erronous map of India in his manifesto, rectifies the error after criticism
  • Sonia Gandhi to take a call on who will be Rajasthan chief minister
  • Mallikarujun Kharge to be the new candidate to oppose Shashi Tharoor in the Congress presidential elections
  • RBI says that the September inflation rate may be higher than 7%
  • RBI hikes key rates by 50bps, downwardly revises FY23 growth rate to 7% from 7.2% earlier
  • Stocks recover well on Friday: Sensex gains 1016 points to0 57426 and Nifty 276 points to 17094
  • Mirabai Chanu wins gold easily at the National Games
  • 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
RBI hikes key rates by 50bps, stocks jump and recover 50% of the losses incurred in the last few session
oppn parties
There is Logic Behind RBI's Rate Cut

By Sunil Garodia
First publised on 2015-09-30 09:04:08

About the Author

Sunil Garodia Editor-in-Chief of indiacommentary.com. Current Affairs analyst and political commentator.
The RBI governor, Raghuram Rajan, once again showed that he is his own man, and said as much (“My name is Raghuram Rajan and I do what I do”), by slashing the repo rate by 50 basis points – more than double of what had been expected by economists and the Street. This means that the RBI has cut rates four times this year for a total of 125 basis points, bringing down the repo rates at par with the prevailing rates in March 2011.

Rajan had resisted the pressure for cutting rates from both the government and the industry in the past. His thinking was clear. He had set the goal of curbing inflation. Lower rates mean more lending and more money in the market means inflationary pressures. Now that inflation has come down to as low as 3.66 per cent (August figures), Rajan feels there is a need to make cheaper funds available to industry to kick start investments.

Both the RBI and the government expect the banks to pass on the rate cut to end users and PSU banks have taken the lead. SBI has announced a 40 basis point cut on its base lending rates. Other banks have followed suit. Buckling under bad debts and saddled with implementation of non-profitable government schemes, the retention of 10 basis points is advisable for these banks .But the surprise came from ICICI Bank, the country’s largest private bank. Its MD Chanda Kochar was non-committal, saying the rate cut would be substantial and maybe more than half of what RBI had cut.

The rate cut means that although lending rates will come down, so will deposit rates. Hence, while both corporate and retail borrowers will rejoice, savers will take it as a disincentive to save. Banks are likely to lower deposit rates too which are already very low at 7.50 per cent. The government has also indicated that it will conduct an across the board review of interest rates of small savings schemes.

But it is not likely that the rate cut alone will give a push to investment and help in economic recovery. The overall sentiment for industry is gloomy. Exports are down due to the slowdown in world economy. Domestic demand is sluggish. Large projects have been held up due to various other factors like land availability and environment and other clearances. The rate cut will give a boost to smaller industrial units in the short run and the cascading effect is likely to generate employment opportunities and further investment. For the bigger economic recovery to happen, the government will have to pitch in by undertaking structural reforms.