In an interesting development, the Reserve Bank of India on Wednesday kept the repo rate – the rate at which the RBI lends to commercial banks – steady at 6.25%. In its statement, the Central bank argues that its decision is in line with "achieving Consumer Price Index inflation at 5% by Q4 of 2016-'17 and the medium-term target of 4% within a band of +/- 2% while supporting growth." It seems unsure of how inflation scenario will play out, while the nation deals with the fallout of demonetisation.
As expected, the RBI is keeping its cards close to its chest and may have come to the conclusion that easing interest rates may not spur growth. The last time the central bank reduced the repo rate was in October 2016, bringing it down by 25 basis points to 6.25%. It was not enough to spur the credit growth required to kick-start the secondary sector. A cut in RBI's short-term interest rates may not fuel the investments needed. Over the past couple of years, demand in the Indian economy has tanked, especially after the advent of demonetisation.
Moreover, the problems are structural with banks unable to shake off the bad loans weighing it down, thereby curtailing their ability to lend. RBI Governor Urjit Patel had, in fact, argued that banks have passed on only around half the 1.75% cut in policy rates so far. The onus is clearly on the Centre to clean up the banks and recapitalise them. Also, the RBO attributed its caution to the "uncertainty" around "the direction of US macroeconomic policies with potential global spillovers". With economies increasingly taking the "protectionist" route, allied with political instability, caution is the only way out.
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