The RBI’s repo rate cut is unlikely to benefit the economy. While interest rates are the lowest, bank charges are the highest. This is where correction is needed. lower bank charges and not lower interest rates can boost economy
The repo rate cut announced by the Reserve Bank of India (RBI) is unlikely to benefit the economy. However, it may possibly keep the Government’s fiscal deficit a bit low. It will also benefit the Government as it would reduce its burden on home loan subsidies marginally.
The sudden repo rate cut by 25 basis points to six per cent at a time when householders and small depositors are gasping, has not been seen to be a benign act. It is to affect retirees, women and others almost at all levels of the society. The banks have been fast on reducing deposit interest rates though they prefer not to pass the benefit to the lenders.
What is a repo rateIJ Borrowers take loans from banks and financial organisations, who provide these loans after charging a certain amount of interest. Therefore, the rate at which the borrower takes the loan is known as the cost of credit. Banks borrow money from the RBI by selling their surplus Government securities. The rate at which they sell these securities to the RBI is known as the repo rate — repurchase rate.
Presently, the RBI’s monetary policy does not believe that the cost of credit has increased.
A high repo rate results in higher cost of short-term funds. If it is low, the banks or businesses will have to pay less interest payment on borrowed funds. In other words, it benefits the businesses more and is supposed to give a boost to their activities. It may benefit a new home loan seeker but does not benefit the one who has already taken loan.
The rate was cut because inflation is stated to be at its lowest in a few years. The consumer price index (CPI) hit a low in June at 1.5 per cent, though there are indications that it has shown some rise. Food prices have shown a fall though vegetable and fruit (considered luxury) prices have not. The RBI is targeting four per cent CPI inflation but there are views in the Government that the central bank is being conservative in its estimates.
One forgets that even this low inflation is over the high inflation hit economy of 2010 to 2014, when the cumulative inflation touched around 48 per cent. Ignoring this aspect of the economy and suddenly lowering interest rates may not be in the interest of the banks, business and the common man.
Market observers feel that the prices are unlikely to remain at that low level. The reason for low inflation has been many — less cash in the economy, less production, low demand. The monetary policy committee (MPC) is concerned that private investment is low. (the corporates are not investing their reserves). The RBI stated that it is concerned about infrastructure bottlenecks and slow project clearances.
The Government and the RBI are worried about large stressed corporate borrowers. They were unable to repay huge debts they have taken. It has added to the woes of huge non-performing assets (NPAs) of public sector banks. In view of this, large recapitalisation of banks is being done. It is hitting Government finances.
In other words, depositors’ money is being given as loan. These are turning as stressed funds and the depositor is losing on two counts — his interest rates are being lowered and his deposits’ safety, at least notionally, is being affected.
The corporates are not paying back even the principal amount, rescheduling their payments and trying to get concessions. So even without repo rate cut, large borrowers are getting benefits for their profligacy. Interest rates should be increased to drive away businesses from seeking frivolous loans and thriving on it.
The banks are being run on deposits by the common man. They are losing on all fronts. Their interest accruals are coming down. The policy on income tax has affected even meagre accruals. Policy-makers need to remember that interest rate on deposits is a hedging against inflation and compensation by the banks for using their money to do business. It does not come under the definition of income.
Giving the depositors less benefit and tax hounding does also not help the economy. It further reduces their capacity to purchase. It is evidenced by the fall in the Nikkei’s manufacturing purchasing managers’ index (PMI) to 50.9 in June from 51.6 in May, signaling stress in the manufacturing sector. The PMI is an indicator for how the buyers are moving to the market.
Manufacturing growth has eased to a four-month-low in June owing to weak client demand, and concerns related to Goods and Services Tax (GST). It is a transition and the GST is yet to settle down. It has added to the cost of business. So would it again be inflationaryIJ The business is
skeptical but do not rule it out. If it adds to the cost, there are two options — add that to the prices or absorb it. If it is absorbed the profit margins are likely to dip.
The overall factory output in May slowed down according to Ministry of statistics and programme implementation data. The IIP rose 1.7 per cent slower than 3.7 per cent in April. Eight core industries rose 3.6 per cent and non-core industries slowed down further. Even job data was not benign. The use-based classification of industrial output showed that production of primary goods was up 3.4 per cent while capital goods production fell 3.9 per cent. The category of infrastructure and construction goods saw a 0.1 per cent increase in output.
According to the Centre for Monitoring the Indian Economy, 12.3 per cent of all projects — both public and private — were stalled in the first quarter of this year. That’s the third-highest level recorded since June 1995 and the first time since 2004 when over a fifth of private-sector projects have been stalled. This isn’t a problem that can be solved with a 25 — or even a 50-basis point cut in the headline policy rate.
The repo rate cut does not seem to help any of these except possibly moving the deposits away from the banks.
linking all policy framework to rate cut is not prudent. It is double-edged sword. The interest rates are the lowest and bank charges at their highest. That is where correction is needed. let the nation have re-look at the interest rates. lower rates certainly cannot boost the economy but lower bank charges can.
(The writer is a senior journalist)