Worries of growth rate, the path of cheap loans

Posted on 23rd May 2020 by rohit kumar

The Reserve Bank of India (RBE) cut the policy repo rate by 40 basis points on Friday, predicting a fall in growth in the current financial year. However, the central bank cautioned that inflation, particularly food inflation, is rising again. Repo rate is the interest rate that banks have to pay on money borrowed from the RBI. The six-member Monetary Policy Committee (MPC) has decided to keep it 'liberal' until it is required without any change in policy stance to bring the growth back on track.

 

"The MPC considered the risks of the growth scenario to be the most serious," RBI Governor Shaktikanta Das said in an online address on Friday morning. According to Das, inflation will come down from the target by the third quarter. However, inflation has increased at this time due to supply pressures. If the central bank controls inflation, then there will be scope for further rate cut.

 

The MPC voted in favor of reducing the policy rate by 40 basis points to 4.4 per cent from 4.0 by a 5-1 majority. Outside member Chetan Ghate voted in favor of a 25 basis point deduction. The central bank has reduced the policy rate to 115 basis points in three emergency meetings of the MPC since March 27, during a nationwide lockdown.

 

This is officially the lowest repo rate ever. Such a rapid reduction in repo rate was earlier seen in 2008-09. The then RBI Governor D Subbarao reduced the repo rate from 9 per cent in September 2008 to 4.75 per cent in April 2009.

 

Certainly, only the RBI is not taking such steps to cut policy rates. Most central banks of the world are not very concerned about inflation at this time. Most economists also disagree with RBI's assessment that inflation will slow in the coming months as demand will remain weak and heavy production in the Rabi season, 44 per cent increase in kharif sowing and normal southwest monsoon food prices are not high Will stay.

 

Saugata Bhattacharya, chief economist at Axis Bank, said, "The slowdown in growth and deceleration in the source of income will be a major concern due to a decrease in demand and a rising supply, which will necessitate a further reduction in the repo rate in an emergency meeting."

 

Bhattacharya said, "This move of RBI is on the lines of all the central banks around the world, which are announcing unexpected incentives after Covid for fear of deflation and in some cases recession." The cut in repo rate on Friday After the reverse repo rate has also come down from 3.75 per cent to 3.35 per cent. The reverse repo rate is the interest rate that banks get when they deposit their surplus cash with the RBI. After this undisclosed monetary policy, HDFC Bank reduced its base rate by 55 basis points to 8.10 per cent.

 

State Bank of India (SBI) Chairman Rajneesh Kumar said that both the deposit and borrowing rates will come down after the policy initiative of RBI. The rupee fell 0.44 per cent to 75.96 per dollar, closing at 75.62 on Thursday, after the RBI projected a decline in economic growth for 2020-21. It fell 260.31 points or 0.84 per cent to close at 30,672.59 points. The yield on the most traded bonds maturing in 2029 fell 7 basis points to 5.965 per cent, closing at 6.033 per cent on Thursday.

 

Das said, "GDP growth may remain negative in 2020-21 due to uncertainties."

 

Meanwhile, the central bank also extended deferment measures by three months. With this, people and companies going through cash shortage can take a decision not to repay their loan installments by August. This will not adversely affect their credit profile.

 

The central bank also said that interest on working capital can be repaid by March 2021, while earlier it was approved to repay by September. To enable banks to lend more to the corporate sector, the RBI increased the group lending limit of banks from 25 per cent to 30 per cent.