Will RBI’s rate cut boost growth?

Will RBI’s rate cut boost growth?

As Opposition parties are busy with rallies, public meetings and protests to put up a united fight in the upcoming general elections, the Narendra Modi-led BJP government at the Centre is also sharpening its electoral arsenals to retain the power. 

The unexpected constitutional amendment to grant 10 per cent reservations to economically weaker sections of the society and populist sops like Pradhan Mantri Kisan Samman Nidhi (PM KISAN) scheme that offers a free payout of Rs 6,000-a-year to small farmers seem to be biggest weapons that have joined the armoury of the ruling party this time. 

It's a different matter though that Prime Minister Narendra Modi and the saffron party he leads, which rode to power on development agenda and anti-corruption plank in 2014, are resorting to usual pre-poll gimmicks to win over voters. However, that's an advantage every ruling party enjoys, and BJP is using the leeway to the hilt to outwit political rivals.

Further, RBI’s decision last week to cut key lending rate is also seen by many as an attempt by the apex bank to boost economic sentiment ahead of the general elections. RBI went for a surprise rate cut after a gap of 18 months and reduced key lending (repo) rate by 0.25 per cent to 6.25 per cent on February 7. 

Incidentally, it was first monetary policy announcement after Shaktikanta Das, a retired IAS officer and former economic affairs secretary, took charge as 25th Governor of RBI on December 12, 2018. His predecessor Urjit Patel kept key rates unchanged in the previous monetary policy announced on December 5 before resigning on health grounds a few days later! 

Apart from reducing key rates this time, the apex bank also changed its monetary policy stance from calibrated tightening to neutral, paying way for further rate cuts in near-term. It also shifted focus from inflation to growth. Of course, retail inflation declined from 3.4 per cent in October to 2.2 per cent in December, giving some headroom for the apex bank to cut the interest rate and initiate other pro-growth measures. 

But will rate cuts, freebies and frequent payouts help political parties in elections? As TRS party's landslide victory in recently Assembly vindicates, voters do show their gratitude to decent dole-outs and efforts to lessen their financial burden. The BJP government at the Centre, the TDP government in Andhra Pradesh and ruling parties in other states seem to be emulating the pink party as elections draw nearer. 

Further, we should not be surprised if the RBI blesses us with one more rate cut in April before the country completes the general election process. Like the Modi government which departed from the tradition and presented a full budget under the name of Interim Budget, the apex bank also set a bad precedence by lowering interest rates ahead of elections. The moot question is whether the rate cuts will boost economic growth without pushing up inflationary pressures, a curse for the poor. But that will be known only after the elections!            

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