RBI governor Urjit Patel held out an olive branch to the government as he tilted in favour of the retail investor, medium, small and micro enterprises, cash-starved non-banking finance companies and housing finance companies in his Fifth Bimonthly Monetary Policy Statement 2018-19 announced on Monday. The move will not only spur industrial activity as the MSMEs are the backbone of the economy, but it should give a boost to affordable housing, one of the key promises by the Narendra Modi government. Housing also has a multiplier effect in generating employment. This should be music to the ears of the government with the crucial general elections barely four months away.
The governor left the policy repo rate (the rate at which the central bank lends to scheduled commercial banks when they are short of funds) at 6.5 per cent but said he would monitor interest rates as they evolve.
It is important to note that the policy brings transparency in the lending process to the retail sector. The retail borrower and small businessmen will be having the choice of deciding at what rate his/her loans should be benchmarked from April 2019. Earlier it was the marginal cost of funds-based lending rate that prevailed so banks could charge at their whims and fancy. Now lending rates should go down for the retail borrowers and the rates will remain the same till the tenure of the loan. The markets and economists were expecting a pause in rates against the background of softening of retail inflation and benign fuel and food prices.
