RBI takes a small step
Decelerating growth, with third-quarter GDP the weakest in the past 15 quarters, led the Reserve Bank to announce a quarter per cent cut in the repo rate (that at which banks borrow from the RBI) for the second time this year.
India Inc is understandably disappointed that the cash reserve ratio (the portion of deposits banks must keep with the RBI) was not cut. This also means banks will not be in a position to lower interest rates on things like home loans and personal loans. The central bank has signalled that the foremost challenge to the economy is to return to a high growth trajectory. It recognises that a competitive interest rate is necessary for this, but not sufficient, and prescribes that the government must bridge the supply-demand mismatch, keep on the fiscal consolidation path both quantitatively and qualitatively, and improve corporate governance. It notes the government has taken measures to control the fiscal deficit by cutting down on Plan and capital expenditure rather than cutting unproductive expenditure and increasing its revenue collection.
Food inflation, according to the Reserve Bank, is a huge challenge to monetary policy because of the demand-supply mismatch, and headline inflation is expected to stay around current levels because of the effects of the rise in petrol and diesel prices. Interestingly, the RBI has clearly spelt out that under the present circumstances it has little headroom for further monetary easing.
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