Booster dose for economy

Banking reforms must be carried out now in right earnest for the rate cuts to translate into real benefits to customers

AuthorPublished: 8th Jun 2019  12:12 amUpdated: 7th Jun 2019  9:28 pm

As widely expected, the Monetary Policy Committee (MPC) of the Reserve Bank of India cut the repo rate by 25 basis points to 5.75% from 6%. This is the third repo rate cut in a row, signalling a change in the central bank’s policy stance from neutral to accommodative. The rate cut was in line with expectations due to muted growth figures. As a result, all members of the MCP unanimously voted for the rate cut, raising the hopes that the banks will pass on the benefit to the consumers and home, auto and consumer durable loans could become cheaper. The move gives the Narendra Modi government a helping hand to crank up a growth that fell to a five-year low in the quarter ended March. The RBI’s decision to do away with the charges for payments made through NEFT and RTGS is a welcome move. A panel will be set up to revisit the ATM interchange fee structure, which is again a big relief for customers. The rate cut indicates that for the RBI, growth is the primary concern now. India’s growth has slowed for the fourth straight quarter to 5.8% in the January-March period, fuelled by a slump in both investment and consumption. The RBI has also scaled down the growth estimate for 2019-20 from 7.2% to 7%, sending out a clear signal that there will be more cuts if the situation demanded.

Though a 25 basis point cut may not immediately lead to reversing the trend of falling investment and consumption levels, it will at least send the right signal that the central bank is ready to provide a booster dose whenever required. The onus is now on the government to infuse a new vigour in the economy. Unless banking reforms are carried out in right earnest and bad loans reined in, the rate cuts will not translate into real benefits to the customers. The non-performing asset (NPA) crisis in the banks had resulted in a credit crunch and the credit growth moved to non-banking financial companies (NBFCs), which were able to raise money from the bond market and from banks. The banking sector reform will not lead to an immediate change in the way transmission happens, but in the medium term, this will have an effect on the transmission of policy rates to bank lending rates. Facing the mounting burden of bad loans, the banks have become risk-averse when it comes to increasing lending. Instead, the banks tend to use the rate cuts to shore up their own balance sheets, thereby denying the ordinary borrowers the benefits. The transmission of rate cuts would entirely depend on effective recovery of bad loans.