Tax cuts can lift consumption: SBI

Mumbai: Amidst calls for the Reserve Bank to cut policy rates to boost growth in the wake of the coronavirus outbreak, SBI economists doubted the efficacy of rate cuts in invigorating demand, saying a better tool can be reducing indirect taxes which can automatically lift consumer sentiment.

"Though the RBI is likely to bite the bullet to cut the rates to stimulate demand at next policy review, it is unlikely to result in any material impact on invigorating demand, but a combination of a larger rate cut and/or indirect tax rate cut can be better policy options," SBI Research said in a note on Wednesday.

Their view was based on the analysis of credit data of top six banks, constituting three public sector banks and three private sector banks which constitute 52 per cent of total bank credit as of March 2019.

Both private and public sector banks are seeing robust growth in retail segment at 15.7 per cent and 12.8 per cent, respectively.

In case of top eight state-run banks, corporate credit declined by Rs 81,535 crore between December 2018 and December 2019, while during the same period the top three private banks' corporate pie grew by Rs 1.04 lakh crore.

It said a rate cut is unlikely to work in isolation as bank transmission of RBI's rate cut has been slow.

While RBI cut the rates by 135 bps to 5.15 per cent between February and October 2019, the transmission in the 1-year median MCLR till February 20 was only 59 bps.