NEW DELHI: When the Reserve Bank’s Monetary Policy Committee meets next week the big dilemma before it will be whether it should cut rates to spur economic activity, which has seen been shrinking, or will it pause in a bid to control inflation which has gone way beyond its stated tolerance level.
India’s GDP for the year is widely expected by most economists including Former RBI deputy Governor Viral Acharya to shrink by 5-10 per cent , with the largest impact being felt in the first two quarters of the fiscal year.Under these circumstances, the market is betting on a quarter per cent rate cut. The repo rate or the overnight lending rate to banks by the central bank is already at a low of 4 per cent, while the reverse repo or the rate at which RBI borrows from banks is at 3.75 per cent.
For the entire year, experts are predicting about 50-75 basis points cut.North Block, too, is supportive of further cuts in the lending rate as the transmission has been better in the post-Lockdown period and industry is clamouring for cheap money as it reopens. Many economists, however, are cautious about a rate cut. “Besides the fact that we have to be cautious about inflation, we have to realise that the RBI has released a lot of liquidity into the system.
Ideally, the central bank should be working on channelising that money into productive uses,” N R Bhanumurthy, vice- chancellor of the Dr B R Ambedkar School of Economics, said.“Right now much of the demand for credit is coming from the government sector, we need to channelise that into the productive sector,” Bhanumurthy added.
So far in 2020, the RBI has cut its key lending rate by an aggressive 115 basis points.
Economists argue its time for a pause. However, earlier this week, Governor Shaktikanta Das had said that it is still uncertain when supply gains would be restored and “how long will it take for demand to normalise and what kind of durable effects will the pandemic leave behind on our potential growth?” This is being read by many as an indication that the RBI will maintain its hawkish posture and cut rates further.