The RBI recently cut the repo rate by 25 basis points, bringing it down to 5.15%. This is the fifth consecutive cut made by the central bank, proving that the RBI is going easy on the monetary policy. The total of 2019’s repo rate cuts comes up to 135 basis points. Since this is quite a significant reduction compared to 2018’s interest rate, many economists wonder if there is scope for more rate cuts this year.
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Interestingly, going by the RBI’s accommodative stance and taking into account several economic factors, it seems likely that more interest rate cuts may be in store for 2019. Here’s why.
The monetary side offers more leeway
The government of India has recently implemented some strategies to reverse economic slowdown. Among these are corporate tax cuts, which make it easier for companies to increase supply. However, this move is likely to reduce the Indian government’s income by 1.45 lakh crores. As a result, the fiscal side is already tighter than it was before these cuts, making it impossible to have more room for flexibility in policies. The monetary side offers more leeway to make policies and implement strategies that could revive the economy. So, the RBI is likely to make use of this flexibility to introduce more repo rate cuts.
Public consumption still requires a boost
In spite of measures like easing FDI rules in some sectors, support for NBFCs, corporate tax cuts, and bank mergers, public consumption continues to remain muted. To increase the purchasing power of the people and to boost consumption, the money supply in the economy needs to be increased. One of the most reasonable ways to achieve this goal quickly is to make it easier for people to borrow money. This can be achieved if commercial banks lower their lending rates. And to enable commercial banks to cut their lending rates, the RBI needs to slash repo rates further.
The RBI has taken an accommodative stance
Even after the fifth consecutive rate cut, RBI’s governor Shaktikanta Das revealed that the central bank is ready to ease the monetary policy further if it’s necessary. With central banks all over the world loosening their monetary policies to take on the global economic slump, it’s unlikely that the RBI will take a neutral or conservative stance in its upcoming monetary policies. More repo rate cuts would make it easier for old borrowers to enjoy decreased EMIs and for new borrowers to obtain personal loans, available on Finserv MARKETS, at lower interest rates.
Inflation continues to remain below the medium-term target
When inflation is on the rise, the RBI increases the repo rate to reduce the money supply in the economy. Conversely, slashing the repo rate improves the flow of money between various sectors. This move helps bring the economy out of a potential recession. Naturally, it follows that cutting down the repo rate too much may trigger inflation. However, since the current inflation rate continues to remain below the RBI’s medium-term target, which is 4%, it’s safe to introduce more repo rate cuts. Only when the inflation rate threatens to rise above this target is the RBI likely to trade in its accommodative stance for a neutral one.
These factors make it apparent that the central bank may likely bring down the repo rate by a few more basis points. And if future reductions in the repo rate cut succeed in easing the economic tensions within the country, borrowers clearly have reasons to rejoice.
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