Cheaper EMIs, if banks permit
Given the mismatch in the credit to deposit ratio, there are fears about the possibility of banks not passing on the rate cut to borrowers.
Interest rates on both deposits and loans may be on a slide over the next few months for the hoi polloi. If banks begin to transmit the key rate cut announced by the Reserve Bank on Thursday, cheaper funds will be available for individuals, companies, exporters and farmers in the short term. The RBI monetary policy committee, headed by governor Shaktikanta Das, cut the repo rate (that at which banks borrow short-term funds from the central bank) by 25 basis points, to 6.25 per cent. This is the first rate cut since August 2017. It’s also the first time that Mr Das got to chair the MPC meeting after he took over following the exit of former RBI governor Urjit Patel.
Given the mismatch in the credit to deposit ratio, there are fears about the possibility of banks not passing on the rate cut to borrowers. If that happens, the RBI may have to step in and nudge them as in the past. Shaktikanta Das appears to rely heavily on consumption-fed growth given that core and food inflation have been benign in the last few quarters. That also explains the 7.2-7.4 per cent healthy GDP growth and softened stance. The projection of retail inflation at 2.8 per cent for this quarter and 3.2-3.4 per cent in the first half of the next fiscal may perhaps justify a rate cut. Going forward, consumption demand will perk up big time with another two rounds of rate cuts as and when these happen.
Low interest rates and inflation could help the ruling NDA as it readies for the big political battle ahead under Prime Minister Narendra Modi’s stewardship. And the Opposition parties are bracing up to take the contest to the wire, citing economic mismanagement.