RBI to force banks to cut interest rates

RBI inflicts banks to cut interest rates.

The Central Bank stated that they will soon get banks to cut the interest rates, the lending rates to the borrower. The reason for this action was blamed on the fluctuating economic conditions. On the contrary, the commercial banks are not yet completely ready to accept this change. In their defense, they said that in order to ensure economic growth and stability, the central bank should make the policy even more lenient. RBI’s current policy repo rate is 6.5%. On 7th February 2019, the central bank had already lowered the interest rates and stated that it has shifted its priorities to a neutral stance. This was to boost a slowing economy after a steep fall in the inflation rate.

Rate cuts in 2019 so far and their effects on the economy.

The Monetary Policy Committee(MPC) of the Reserve Bank of India, in February 2019 brought down the repo rate to 6.25% (down 25 basis points). The MPC stated that this rate cut was operated with a view to strengthen the private investment and slow down private consumption. MPC observed that although investment activity was increasing rapidly, the major reason for that was public spending on infrastructure. The rate cut announcement caused the Indian rupee to weaken to the US dollar at Rs 71.69 but it gained momentum and ended up at Rs 71.23 soon after.

Although Indian shares were showing good signs and resisted the surprise rate cut whereas the 10-year bond yields slid 5 basis points. The 10-year government bond yield fell to 7.42% from 7.56% after the surprise rate cut. India’s last rate cut was recorded in August 2017. In Q2FY19 the inflation rates were highly volatile and the frequency of interest rates changing was also high. Because of this, the economic growth rate plunged beyond the threshold rate and fell to 7.1% from 8.2%. This was caused by low consumer spending and slow farm growth.

In December 2018 India’s headline inflation dropped to 2.19% whereas RBI’s medium-term inflation target is between 2%-6%. Since the headline inflation being at the verge of the predetermined rate, the rate cut was justified. The lending abilities of the non-banking financial companies being restricted and the economic growth outlook is fragile might have been the reason for the rate cut. RBI Governor Shaktikanta Das stated that although the headline inflation fell at the end of 2018 due to the decline in food and fuel prices it will pick up eventually to around 3%-4% in 2019.


RBI Governor’s outlook:

The RBI Governor has been in talks with the bank chiefs with the aim to convince them to lower the rates and to discuss the monetary policy transmission. Although the talks have been held now, in India rate adjustments take about six to nine months to make changes in the economy. The State Bank of India linked some of their deposits and loans to the repurchase rate. A quarter basis percentage change in the rate will have an estimated impact of around 7-10 basis points on the bank’s floating rate.

The NSE Index was up 1.21% at 11,168.80 on 11th March 2019.






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