By keeping the repo rate unchanged at 5.15% and predicting higher inflation, the Reserve Bank of India has adopted an accommodative stance. It is now up to the government to do some heavy lifting to boost growth. One could argue that there was scope for the central bank to cut the interest rates further but RBI Governor Shaktikanta Das and his team at the Monetary Policy Committee (MPC) had their own constraints and limitations. Undoubtedly, the key constraint comes from inflationary pressure. The unanimous decision to maintain the status quo on the policy rate was expected because the Consumer Price Index (CPI) inflation stands at 7.5%, much higher than the target of 4%. The assessment of the RBI is that inflation is likely to remain above the target level for a couple of quarters, providing no elbow room for the rate cut now. However, the central bank has unveiled two key measures aimed at increasing credit flow to sectors like automobile and real estate and micro, small and medium enterprises (MSMEs). First, it has opened a window to extend Rs 1 lakh crore to commercial banks at the repo rate, which is 5.15%. Second, the banks have been exempted from maintaining the cash reserve ratio for home, auto and MSME loans. This will enable banks to have access to cheaper credit and thereby facilitate quicker monetary policy transmission. Long-term repo operation as a monetary tool is expected to improve liquidity, boost consumption and catalyse economic growth. The onus is now on banks to transmit lower rates to borrowers.
The decision to extend the one-time restructuring of the MSME loans that might have otherwise become NPAs is also welcome. At present, inflation is high and on a rising trajectory due to soaring vegetable prices, particularly onion. There is scope for policy rate cut once inflation comes under control. The economy continues to be weak with the RBI projecting 6% GDP growth rate for 2020-21, pegging it at the lower end of the growth estimate made in the Economic Survey report. The growth outlook will be influenced by several factors, including private consumption level and external factors. Private consumption, particularly in rural areas, is expected to recover on the back of improved rabi crop prospects. The recent rise in food prices has shifted the terms of trade in favour of agriculture, which will support rural incomes. The easing of global trade uncertainties should encourage exports and spur investment activity. Also, rationalisation of personal income tax rates in the Union Budget should support domestic demand along with measures to boost rural and infrastructure spending. However, the coronavirus outbreak may impact tourist arrivals and global trade.