RBI does its bit, govt's turn next

The Reserve Bank of India’s Monetary Policy Committee has reduced repo rate — the rate at which the central bank lends to banks — by 25 basis points to 5.15 per cent, which is the lowest since March 2010, when it stood five per cent. The cumulative reduction in the repo rate this year stands at 135 basis points — 100 basis points make one percentage point — making the RBI one of the most aggressive central banks in Asia.

Friday’s rate cut was widely expected by the analyst community, as the RBI was under tremendous pressure to support the government’s efforts to revive the sagging economic growth by boosting demand. Having reduced the repo rate, the issue at hand for the central bankers is the transmission of the rate cut to borrowers, which continued to be tardy.

Compared to a repo rate of 135 basis points over the one year, banks have slashed their lending rates only by 29 basis points. Transmission of lending rate cuts in India is rather slow in India because of their link to the deposit rates that determine the cost of funds for lenders. Until the interest rate for borrowers is brought down, the RBI’s decision will not have an effect on the ground.

Even if the lending rates were passed on the consumer, it would at best be a task half done as India is currently grappling with poor consumer sentiment. Unless people are confident about a sustained increase in their income levels over a period of time, they may not be inclined to commit themselves to taking on debt for the sake of consumption.

A slow wage growth since 2013 — unlike high growth witnessed in the previous years — may not inspire people to take loans to splurge on non-essentials. This is an issue clearly out of the RBI’s domain and so it has lobbed the ball back into the court of the government.