RBI, the Central Bank of India, is grasping at straws when the price of onions is making the headlines. A report says, presently the average price of one-kilo of onion amounts to Rs 100 across 114 cities. Thus in search of the perfect equilibrium between inflation and money supply in the economy, there have been few consecutive rate cuts by RBI in the Financial Year 2019-2020.AMEND ONREPO RATESChange in RatesFebruary 20196.25%0.25%April 20196%0.25%June 20195.75%0.25%August 20195.40%0.35%October 20195.15%0.25%December 2019No change0%February 2020Yet to be decided–
It is vivid from the above table that there has been a policy shift by RBI. With every slash of base points, RBI’s stance also shifted from Calibrated to Neutral, then towards Accommodative. India has a consumption-based economy and sudden deceleration of consumption rate has put immense pressure on the government as well as RBI. According to my opinion, RBI has adopted an Accommodative stance and continued to stay on this stance till October’19 due to below reasons:
RBI forecasted that there will be a decrease in the growth rate of the country, promoting Economic Slowdown.
They wanted to increase the money supply in the economy. They want more money to be with common people.
The chronic slow down in the industries like automobile and telecommunication which contributes more than 7 % to the GDP on average.
Also, the most important reason behind the often rate cuts can be many frauds like PMC, PNB and recently SBI which are being reported.
The liquidity crunch triggered by the sudden inability of the non-banking finance companies to pay back loans.
Not only RBI, but all Central Banks are also following the path of rate cuts may be due to Global Recession jitters, to boost credit flow in the economy or maybe due to geopolitical tensions with respect to trade. Federal Reserve, the Central Bank of USA, has also declared rate cut in August 2019, first time after 2008 Global Financial Crisis and by October’19, Fed declared third rate cut. The rationale behind these rate cuts might be due to concerns about the global economy, too low inflation rate and US economic expansion. The rate cuts by the Fed have a greater impact on an emerging economy like India. The most positive impact is on the Indian debt market since rate cuts in the US will give less return to investors thus they will show enthusiasm on the Indian market where there is a possibility of higher returns. On the same note, there can be a negative impact on the Indian equity market and fall in the stock market.
RBI’s frequent rate cut policy was for the betterment of our country but unfortunately, it entered into a vicious cycle. With borrowings becoming cheaper, there will be an increase in liquidity in the economy. Slow down in different sectors can be minimized. This will also boost growth in the private sector. Moreover, this will also ensure credit flow to NBFCs. But in the Demand-driven economy like India, it’s important to maintain the equilibrium. In the latest bi-monthly monetary policy, RBI decided not to cut-rate further. This is because of the high inflation rate, especially in the food sector. RBI predicted that the growth rate will be slashed around 5%. Thus they kept the repo-rate unchanged to keep a check on the money supply. This is the lowest repo-rate recorded in the last 9 years, yet economic growth failed to pick up. The reason behind this might be because of elevated trade tensions and geopolitical uncertainty. Moreover, the transmission of the earlier rate cuts by the banks to the borrowers has not been passed in an accurate manner. RBI’s own assessment revealed that only 21 base points have been passed by the banks to the borrowers before the August rate cuts. Now, all eyes on the next bi-monthly monetary policy report where RBI will reveal their next set of plans for our economy.
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