RBI likely to cut repo rate; may not help growth

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(Online Desk)

RBI may reduce the repo rate on Thursday for the sixth time in a row, but analysts believe India’s monetary policy is somewhat powerless to prevent growth going sideways.That’s because of two reasons.

One, banks are refusing to play ball, having passed on a mere 40 bps to customers out of RBI’s 135 bps repo reduction since February.

Two, commercial credit flow slowed to a crawl because of the unwillingness of companies to borrow and of banks to lend. With rising headline inflation and falling GDP, the RBI finds itself in choppy waters to decide between price stability and growth.

“The high real rates in India suggest a case for further easing, given that the CPI rise is largely food prices-driven. This tug of war, in our view, may pave the way for a rate cut in the upcoming policy,” reasoned Lakshmi Iyer, CIO, Kotak Mahindra Asset Management.Repo rate, the rate at which banks borrow from RBI, currently stands at 5.15 per cent.

With Thursday’s proposed 15-25 bps reduction, it’ll be at a decade-low of 5 per cent.But will it make any difference? Hardly, say economists, with evidence on their side. Given the fact that the previous 135 bps repo reduction failed to charm markets or manufacturers, Thursday’s proposed cut may do little to reverse the slowdown.

For now, the real deal lies with banks, who have to do just two things, but aren’t. One, reduce interest rates. Two, go out and lend. But scars from their reckless lending a few years ago are still fresh, which is why risky sectors like construction, power and infrastructure projects are strictly a no-go zone.

Latest RBI data confirms that fund flow from banks and non-banks to the commercial sector plunged 88 per cent to Rs 90,995 crore in H1FY20 compared to a staggering Rs 7.36 lakh crore last year.

The slack in investment dragged GDP growth to a 25-quarter-low of 4.5 per cent in September, leaving government spending to make up for the lack of private participation.

Core inflation grounded: October retail inflation stood at a 16-month high, led by firming food prices. The good news, though, is that core inflation remained grounded, which also implies that demand for non-food items is badly battered.

If inflation touches 5 per cent in November, bank deposit rates will turn negative.

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