On the 4th of October’16, in its first public pronouncement as the RBI Governor, Dr. Urjit Patel announced to cut repo rate by 25bps bringing it to 6.25%, a 6 year low.
“Many claim that the recent policy change of rate cut by RBI was under the duress of central government.”
“Others are of the opinion that the rate cut was a justified act of the newly appointed Governor and has no co-relation with the central government.”
Whatever it may be, the recent policy decision, to cut the interest rate by 25 bps, has different implications for different lines of sectors in the economy.
Q- How will the decision to cut repo rate affect the consumers’?
The rate cut by the central government was also followed by a reduction of the interest rates on the small savings scheme by 0.1% for the October-December quarter of this fiscal year. The schemes include Public Provident Fund, Kisan Vikas Patra, and Sukanya Samriddhi Account.
With reduction in the rep rate, the banks are expected to pass on the rate cut benefits to their customers by offering them cheap home and vehicle loans and also the EMI of existing customers are likely to come down.
This move by RBI if adopted by the banks will not only facilitate the existing customers but will also attract more customers to the financial institutions. Also this cheap credit policy will lead to an increase in the demand for loans, leading to an increase in money supply in the economy and in turn adding to the existing demand for goods and services and enabling an economic growth.
In the light of the increase in the money supply, following the spur in growth, chances are that this will lead to a rise in the level of inflation. This move by RBI was taken to negate the forecast of the low levels of Inflation expected this quarter; we hope this act does not turn out to be a double-edged sword.
Q- How has India Inc. reacted to RBI’s 25 bps repo rate cut?
Industry Leaders have welcomed the RBI decision to cut down the repo rate as this rate cut is ought to translate into low lending cost for both the corporate and the public.
This will have a great impact on the income multiplier effect as it will increase lending and investment activity in the economy and therefore correspond to an increase in the consumption activity and demand. This will sure work as a catalyst for growth and will lead to a spur in growth.
Also, the Finance Ministry endorsed the central bank’s move to cut the repo rate, stating that the move will boost liquidity in the system.
“On the whole, this is a decision which will go down well with all sections of the Economy”- Union Finance Secretary, Ashok Lavasa.
Note: The ideas in this blog are from the viewpoint of the author and the team.