In a bid to tackle the liquidity crisis, the RBI has cut rates by 25 basis points. This move comes a month prior to the 2019 Budget presented by the Modi’s government 2.0.
Some say 25 basis points will be insufficient to stimulate growth, whereas if rates are slashed up to 50 bps, growth would be evident.
The RBI’s move has got a nod of approval from several economists who have felt that this could be the only way to recover the slipping GDP. Many have said that the move could set the inflation in check, while keeping the main focus on growth.
The Monetary Policy Committee (MPC) meet comes at a time where RBI cut the policy rate by 50 basis points so far. However, the banks have not yet adjusted their lending and deposit rates. Economists are hopeful that the rate cut could help steady the 4% target over the next three quarters. Core inflation hit around 5.5% for around 6 months while food inflation had a dragging momentum.
There has been a slippage in domestic consumption and exports will face a slowdown in the coming quarters. There are hopes that inflation may not exceed 4%, while looking to create and improve fiscal growth.
According to Soumya Kanti Ghosh, there had been a leakage of around Rs 3 lakh crore of liquidity into currency, stressing on the fact that pre-elections mean cash needed for campaigning and other purposes. So, liquidity within banking and shadow banking sectors are a growing concern.
Ind-Ra believes that while banks are struggling with high NPAs, NBFCs are struggling with solvency issues leading to credit freeze. This credit freeze could be because of a slump in the micro, small and medium enterprises (MSME). However, it could get better if there is an asset quality review (AQR) underway.
The Repo and Reverse Repo has been left unchanged at 6% and 5.75% respectively. Some believe that a rate cut alone may not help growth at this point in time. It is the Central Government Policy that needs to look at narrowing the gap of sub-optimal growth.
Fed has also said it would cut interest rates as the economy plunges for an impending trade war. As global crude oil prices and adequate food grain stock soften, RBI ‘s 25bp rate cut to 5.7% seems appropriate. This would be the third consecutive rate cut adding up to 75bp reduction in the policy rate so far in 2019.
