RBI’s Monetary Policy Is An Extension of Modi’s Interim Budget

If the government’s budget this time was interim then RBI’s policy announcement was lock, stock and barrel.

The Quint’s Editorial Director Sanjay Pugalia on RBI’s monetary policy decision.

(Photo: The Quint)

Video Editor: Mohd Ibrahim

RBI’s latest policy is very special as it is the first policy decision after the new RBI Governor Shaktikanta Das assumed charge. If the government’s budget was interim, then RBI’s policy announcement was lock, stock and barrel.

Let’s take a look at how our economy is performing.

In this monetary policy, the RBI has cut interest rates saying inflation is under control and that growth needs more focus. The RBI announced a cut in 25 basis points in the repo rate ie repo rate is now at 6.25 percent. The reverse repo rate as a result stands at 6 percent.

Steps have also been taken to address the liquidity problem. But, the biggest revelation in the policy was that, so far, a farmer could have got a loan worth Rs 1 lakh without any guarantee. Now the loan amount – without guarantee – has been revised to Rs 1.6 lakh.

The Downside Risk of Economic Growth

Below are the risks of growth laid down by the RBI.

• Credit growth is tepid
• Farm sector is facing distress
• Risk of food and fuel inflation persists
• Concerns over trade deficit
• Reduction seen in import growth
• Growth rates in service sector is still declining

Apart from this, it has been said that global concerns such as Brexit, US-China trade war can have an impact on markets.

If all these factors are considered, RBI’s assessment is that it is important to push growth hence reduction in rates have been made.

Bigger reduction in policy rate would perhaps have helped growth, however, reduction of mere 0.25 percent would not make much difference.

What About The Cash Surplus?

The proverbial sword of ‘cash surplus’ is hanging over the Reserve Bank of India. The question is how much cash from the surplus will the RBI give to the government.

This year’s target is approximately Rs 25,000 crore. However, Interim Finance Minister Piyush Goyal has spoken about asking RBI to transfer a part of its reserve.

As per the market experts, if Rs 1 lakh crore is asked for, questions would be raised on RBI’s autonomy.