Will RBI Governor's 'Das cuts' end up pleasing nobody?

If consumption fails to pick up in the festive season showdown, the government will have to resort to Plan B -- the only option left in its fiscal toolkit -- by reducing personal income tax rates.

Published: 04th October 2019 03:48 PM  |   Last Updated: 04th October 2019 03:48 PM   |  A+A-

RBI governor, RBI, Shaktikanta Das

RBI governor Shaktikanta Das (File Photo | PTI)

Express News Service

The RBI on Friday reduced the repo rate by 25 bps to 5.15 per cent from 5.4 per cent.

After an unconventional 35 bps cut in August, the Monetary Policy Committee (MPC) refrained from being foolhardy but vowed to continue flooding the economy with cheap money until it gets better. 

One external MPC member, Ravindra Dholakia, rooted for a radical 40 bps reduction, perhaps to round off repo rate at 5 per cent. 

But as Governor Shaktikanta Das later explained, the MPC preferred to sit out until the government's recent fiscal measures, including corporate tax cuts and the RBI's previous 110 bps cuts, trickle down before proceeding further. 

The latter is critical, as the 'Das cuts', unconventional or otherwise, run the risk of ending up as 'please nobody' policy actions. So far, they've failed to invoke even the usual charm on credit growth, which is notably lacking in speed.  

From last year's death by rate hikes to Friday's life with five rate cuts, the RBI's volte-face may come full circle, as the sharp downward revision of GDP estimates (and of course actual growth) could blaze sentiment and sales. 

First, the MPC lowered the September quarter growth from 6.9 per cent to 6.1–5.3 per cent, perhaps fresh from the June quarter shocker, where GDP growth slumped to a dismal 5 per cent. 

Second, the growth projection for the next months isn't noteworthy either at 6.6-7.2 per cent. Third, worryingly, estimates are revised downwards to 7.2 per cent for the first quarter of the next fiscal too. 

In other words, it confirms that the economy, which indeed is not in good shape, may take at least a year or longer to reach the sunlit uplands of 7-8 per cent per annum. Admitting as much, the MPC thus made no bones of using up all the precious monetary firepower in its armoury 'as long as it is necessary to revive growth.' That's shorthand for policy rates to go down and down. 

“There may be further cuts in the rate in the light of the GDP growth forecast being lowered from 6.9-6.1 per cent for FY20. We need to see more action from the government for a consumption-led recovery," said Dr K Joseph Thomas, head, research, Emkay Wealth Management.

Essentially, the 25 bps cut is a signal for upset bond traders to see it as a taste of more to come. "While money market rates eased in response, bond yields inched up slightly as traders remain apprehensive of larger than currently scheduled borrowings by the government. The market will now look forward to any possible OMO purchase operations to get comfort on absorption of additional supplies if any," said Mahendra Jajoo, head, fixed income, Mirae Asset Global Investments. 

With Friday's cut, the repo rate is down by 135 bps in nine months, which is beneficial for borrowers, but destructive for depositors, who may scurry to alternative options like small savings schemes, for rates remain attractive. Banks will reduce interest rates on fresh home and auto loans straight away, thanks to the debut of repo-linked products for retail borrowers and SMEs starting this month. 

Banks are flush with liquidity and are grinding into gear even if it means going to the borrowers' doorsteps with forced loan melas. Sellers, on the other hand, are offering groceries and consumer goods at knock-out prices. Put another way, consumers now have the whip hand and growth is squarely dependent on how they spend. 

But unhelpfully, the RBI's consumer confidence survey shows weak consumer sentiment and tepid consumption demand, especially relating to non-essential items, while producers see weak demand even during the ongoing festive quarter as the cost of finance and salary outgoes remain muted. 

Notwithstanding all the measures, if consumption fails to pick up in the festive season showdown, the government will have to resort to Plan B -- the only option left in its fiscal toolkit -- by reducing personal income tax rates. 


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