Boost to industry

Even as the stock market expected a reduction of 25 basis points, the RBI Governor Raghuram Rajan went ahead with a bonanza of 50 basis points cut in repo rate to 6.75 percent, of course, with a rider that banks pass on the benefits to customers.

One can say, by cutting rates now, Rajan has coolly escaped from possible accusation that he is pushing economy into deflation.Perhaps,

this made him change his views on the inflationary trend, earlier he was opposed to Chief Economic Adviser Arvind Subramanian’s view that the Indian economy is a bit closer to deflation territory. Rajan is a strong believer that the country is into disinflation.

In support of his rate cut decision, Rajan says most of the conditions, including inflation laid by the apex bank in its previous policy statement in August, have been met, except for a bad monsoon, and hence the rate cut. Consumer inflation is pegged at 5.8 per cent in January, below 6 per cent target, and he acknowledges government's efforts in containing food prices.

In the same breath he says prices of vegetables and pulses are still rising. He brings down the inflation target to 5.5 to 5 per cent in 2016-17. But in August, the inflation dipped to a record low of 3.66 per cent.

On the debt market, the monetary policy announced relaxation of foreign investment cap in government bonds to 5 per cent by March 2018, while the investment limit in the bonds will be announced every March and September of the year.

In aggregate terms, this would open up an additional investment of Rs 1,20,000 crore in the government securities by March 2018, over and above the existing limit of Rs 1,53,500 crore for all government securities (G-sec). Besides, for the first time, the monetary policy also allowed the foreign portfolio investors to buy state government securities.

Meanwhile, banks have been sore over the special status given to small savings in terms of interest rates. Now the government is proposing to reduce the interest rates on small savings, thus hard-hitting the pensioners and middle classes who are dependent on the interest earned from small savings, like PPF, NSS etc, to meet their both ends.

Thus the rate cut decision affects those groups who cannot put up any fight over dwindling of their interest income. Eventually, these under privileged classes would forget the habit of savings.

For the starters, a 50 bps reduction in repo rate amounts to 7.75 per cent base rate for banks. It means the bank deposit rate may fall to around 7 per cent.

While RBI brought down the rates by 125 bps (including 75 bps earlier), the banks have still not passed on the benefit fully to its customers. But now, after fall in the interest rates of small savings schemes,

the banks may be tempted to reduce the deposit rates first, and take their own time to reduce the loan rates. Tail piece: the industry benefits, while common man pays for it.

Editor: Prof K Nageshwar