It was a masterstroke on the part of the RBI governor, Dr Raghuram Rajan, to make this cut of 50 basis points (half a per cent) in repo rates at this time. The domestic economy is ripe for a strong interest-rate stimulus considering the need for domestic growth in view of weak global trade and the economies of both the developed world and the emerging markets.
Dr Rajan has also stimulated the government bond markets by increasing the FDI limit in government bonds to five per cent by March 2018 from the present 3.2 per cent. This will see an addition of Rs 1.2 lakh crore in government securities with Rs 26,000 crore expected in the current year. It is even a thumbs-up for cooperative federalism and a bonanza for state governments which, for the first time, can expect to see inflows in state government bonds of Rs 50,000 crore, of which Rs 7,000 crore will come this fiscal. Low-cost housing and construction activities have got a fillip due to the reduction in the minimum risk weight applicable at a lower value. The Sensex soared over 400 points before settling 163 points up due to global pressure.
Dr Rajan said RBI’s focus will now shift to working with the government on how banks can transmit this interest-rate cut to the economy. Despite the 75 basis points cut since January this year banks have passed on just 30 basis points; now the total cut will amount to 125 basis points. SBI has already cut lending rates by 40 basis points and others are expected to follow suit.
It is still not clear if housing and personal loan rates will come down immediately. One of the points for transmission of cuts that will be discussed is a framework to bring down the current small savings rates to enable banks to compete for deposits. Such a cut would hurt the poor. The RBI governor, however, feels that low inflation would still give small savings depositors higher value on their savings.
Dr Rajan has revised the growth rate slightly downwards, to 7.4 per cent from the 7.6 per cent announced earlier, because of slow global growth, lack of appetite for new investments in the private sector and constraints in bank lending due to stressed assets and waning business confidence. But he has revised inflation downwards to 5.8 per cent in January 2016. It is hoped that the rate-cut will lead to a pick-up in demand. It is now for the government to do its bit through structural changes on the supply side, and for the private sector to make new investments and not wait and depend only on government spending.
