The Reserve Bank of India (RBI) has constituted an internal group to study the marginal cost of lending rate (MCLR) system for commercial banks created to improve monetary policy transmission, RBI Deputy Governor Viral Acharya said on Wednesday. He also said that inflation is expected to increase with the current fiscal.
RBI governor Urijit Patel also acknowledged that borrowers have not benefitted to the full extent on the amount of RBI's rate cuts as banks have been selective in passing on the cuts.
Upside risks to inflation may however play the spoilsport. But the bank's base rate has fallen only by 30 bps from 9.3 per cent to 9 per cent during this period. The rate cut would give a fillip to the market sentiment as the Indian stocks are trading at a record high.
Growth slowed in the fourth quarter ending in March to 6.1 percent, but the government defended the pain as necessary to clean up corruption rife throughout the economy.
The rate cut is propelled by a lower inflation rate.
The central bank has kept rates on hold at 6.25 per cent for the fourth straight time citing inflation risks and even changed its monetary stance from accommodative to neutral. "While a cut of 50 bps would have been welcome, a cut of 25 bps after four straight reviews when rates remained constant, is a welcome step", said Niranjan Hiranandani, president, NAREDCO West. PHDCI opined that reduction in the key lending rate will not only reduce the costs of doing business but also enhance exporters' competitiveness in the worldwide market. "There is a debate on", Professor of Economics at Harvard University Kenneth Rogoff told a news channel here, referring to the prolonged phase of low inflation coupled with low growth being experienced by Western economies. The last rate cut was effected in October 2016.
It has stressed on urgent need to reinvigorate private investments, clear infrastructure bottlenecks and provide a major thrust to the Pradhan Mantri Awas Yojana. Lowering of interest rates helps in making faster decisions as it becomes affordable to majority of consumers looking to buy a property.
Good monsoon should keep food inflation under check. "This reinforces my view of room for incremental rate cuts to the tune of 50-75 bps (or 0.5-0.75 per cent) in coming months, which will reinforce RBI s parallel efforts to address the twin balance sheet problem and support growth recovery".