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No rate cut boost

No rate cut boost
Highlights

The Second Monetary Policy Committee (MPC) of RBI has belied wide expectations of a rate cut boost to the economy reeling under demonetisation and global headwinds of recession. 

The Second Monetary Policy Committee (MPC) of RBI has belied wide expectations of a rate cut boost to the economy reeling under demonetisation and global headwinds of recession.

The MPC has kept the Repo rate – the rate at which RBI extends short-term loans to banks – unchanged at 6.25 per cent.

It cited demonetisation drive as well as ‘heightened uncertainty’ of volatility due to likely US Fed rate hike as enough reasons to maintain status quo.

MPC is highly concerned that the rupee is under pressure. It fears US Fed rate hike could spark huge macroeconomic implications for emerging market economies, which warrant caution with respect to setting monetary policy stance.

This is quite surprising despite RBI admitting to weak demand and firming up of input costs dragging down profitability of corporations.

It has thus denied the nation a supportive measure to offset downside risks from weak demand and demonetisation.

The macroeconomic conditions since October when the RBI slashed the repo by 25 basis points to 6.25 per cent have only worsened, what with note ban shockingly numbing consumer demand.

But for agriculture, the GDP would not have touched 7.3 per cent in Q2. Both services and manufacturing sectors saw contraction.

Demonetisation is adding to the meltdown, squeezing customers’ spending capacity and drying up orders for industries and businesses, and hence the fervent hope for a rate cut, even by up to 50 basis points.

However, the RBI has provided some solace to the banks. It has withdrawn 100 per cent hike in cash reserve ratio (CRR) which was at 4 per cent.

The move was effected to suck up liquidity in the system as the banks are awash with deposits since November 9 demonetisation drive.

CRR is the percentage of deposits that the banks need to park with the RBI, earning no interests rates. Thus, banks may face fiercest competition among themselves for prospective loanees and cut rates, too.

Various studies of think tanks portend a .5 to 1 per cent fall in India’s GDP from 7.4 per cent last fiscal due to demonetisation.

Former PM and central banker Manmohan Singh sees a fall of as much as 2 per cent. Even the RBI forecast the growth to fall to 7.1 per cent from 7.6 per cent previously.

Expectations of hike in US interest rates and consequent flight of capital may bother the RBI panel, but it should have understood that a repo rate cut by the world’s fastest economy would boost demand and productivity and bring down the cost of borrowing.

This would attract global investors and consequent fund inflows would have eased pressure on the rupee which slid to 15-month low in November at 68.47.

Also a benign 14-month low inflation at 4.2 per cent is another conducive factor for rate cut.

The MPC which had shown in October that it was keener on boosting growth rather than inflation adjustment had dashed the hopes of industry and economists.

With the RBI in wait-and-watch mode, the nation has to pin its hopes on the next MPC meeting on February 7-8, 2017.

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