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RBI cuts rates again. In what way its going to effect us and economy of India?

Question asked by Anurag Sisodia in #Debates #Indian Political on May 22, 2020
Anurag Sisodia
Anurag Sisodia · May 22, 2020
Rank D2 - MASTER

The RBI has further reduced both the repo rate and the reverse repo rate in yet another bid to revive economic activity. It did so in a special meeting of the monetary policy committee (MPC). Five of the six members of the MPC voted to reduce the repo rate by 40 bps to 4%. The reverse repo rate has been cut to 3.35%.

The repo rate is the interest rate at which the central bank lends to commercial banks, while the reverse repo is the rate of interest that commercial banks earn on funds they park with the RBI.

There has been much debate on whether these measures by the RBI – essentially monetary policy – will have the desire impact in the absence of significant fiscal measures (putting cash in the hands of people) by the government. Also, in a scenario of weak demand, pending wages, and economic uncertainty, banks have been reluctant to lend, preferring to earn the bare minimum interest by keeping their funds parked with the RBI. This probably explains why the RBI has further cut the reverse repo rate – it’s the central bank’s way of prodding and nagging the banks to loosen their purse strings.

Also, in yet another monetary measure aimed at injecting liquidity, the RBI has extended the moratorium on repayments of term loans and working capital loans by another three months.

“Domestic economic activity has been impacted severely by the 2-month lockdown. The top six industrialised states that account for about 60% of industrial output are largely in red or orange zones,” RBI governor Shaktikanta Das said. “High frequency indicators point to a collapse in demand beginning in March 2020, across both urban and rural segments,” he added.

Interestingly, the central bank refrained from giving a projection for GDP growth for the current financial year. It would only say that GDP growth would be in the “negative territory” – with some pick-up in growth impulses from the second half of 2020-21 onwards. “It is in the growth outlook that the MPC judged the risks to be gravest,” Das said.

Posted in: #Debates #Indian Political

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