oppn parties RBI Cuts Rate, Changes Stance To Accommodative

News Snippets

  • Defence minister Rajnath Singh says India might revise its policy of "no first use" of nuclear weapons in national interest
  • Ravi Sashtri to remain head coach of Team India fro another two years
  • India defends move on Article 370, says entirely an internal matter
  • UN holds closed door meet on Kashmir but China fails in its attempt to censure India
  • Limited public transport service to be restored in J&K from this weekend
  • Educational institutions to reopen in phases from Monday in J&K
  • Government decides to restore telecommunications in phases in J&K starting with landline phones this weekend
  • PM Modi announces that India will have a Chief of Defence Staff soon
  • PM Modi says government worried about population explosion, will introduce schemes to control it
  • Prime Minister Modi explains the decision to read down Article 370 in his address to the nation on the occasion of Independence Day
  • All 6 accused in Pehlu Khan lynching case acquitted
  • Cricketers will now be tested for dope as BCCI decides to come under NADA after a prod from the government
  • NDTV promoters Prannoy and Radhika Roy prevented from travelling abroad. Channel says it amounts to subversion of media freedom
  • TMC spokesman Derek O'Brien questioned for two hours by the CBI on the party mouthpiece 'Jago Bangla'
  • Former finance minister Arun Jaitley has been admitted to AIIMS for breathing problems. His condition is said to be stable
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RBI Cuts Rate, Changes Stance To Accommodative

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Sunil Garodia By our team of in-house writers.

Benign inflation, slowing economy and the return of NDA (that assures continuity in policy and the hope of a renewed sense of fiscal responsibility on the part of the government) has allowed the RBI to change its policy stance from neutral to accommodative and reduce the key repo rate by 25 basis points to 5.75 percent, the lowest since September 2010. The change in stance also means that further rate cuts are in the offing.

Although the markets were not enthused by the rate cut (the Sensex crashed by 554 points after the announcement) there are many positives in the RBI decision. All economic indicators are signaling a slowdown with demand for goods and services not picking up. Some sectors are showing negative growth. Although it is true that projects are not dependent only on the interest rates (promoters factor in the cost of acquiring capital in their overall project costs and go for the project if they can sell the products after acquiring capital at current interest rates), it is also true that some projects that seemed unviable at high interest rates may become viable at lower costs. Lower interest rates on retail loans may also spur the demand for goods thereby giving a boost to the manufacturing sector.

The economy needs a push and making capital available at a lower cost is one of the ways to encourage entrepreneurs to expand capacity or go for new projects. The RBI has made it known that it will prod the banks to pass on the benefit to customers. If there is a renewed demand for products due to cheaper loans which in turn encourages entrepreneurs to expand or install new projects then the economy will come out of the morass it seems to be sliding in. But the government will have to play its part by keeping a tight control on fiscal deficit and making investments in infrastructure.