Borrower’s burden will reduce following RBI’s decision to slash the rate at which it lends to banks from the earlier 6.50 per cent to 6.25 per cent.
The RBI, in a highly anticipated move, in its statement tried to answer the question whether the rate-cut will rekindle the fire in the kilns of Indian businesses and send more materials-carrying trucks to sites where projects were under-construction and choked because of supply-necessities.
The Monetary Policy Committee (MPC) of the RBI, which sat for its first monetary policy statement release on October 06, had the price-rise levels marked at 5 per cent (which it hopes to achieve by Q4, 2016-2017) and, for the medium-term, at 4 per cent allowing for an increase or decrease of 2 percent, before it opened the tap to fill the economy with cash after a strict Inflation-led policy regime of the previous governer, Raghuram Rajan.
The RBI ‘notes that the sharp drop in inflation reflects a downward shift in the momentum of food inflation – which holds the key to future inflation outcomes’.
The retail inflation that had an uptake, driven by food inflation, between April and July, fell sharply in August. Further, moderate levels of fuel prices, and also the prices of those goods and services excluding non-food and non-fuel that hovered around 5 per cent, added to the reasoning that cheered for a rate-cut.
Although, input costs in the manufacturing sector gave an indication of shooting up, ‘the presence of considerable slack has restrained their transmission into corporate pricing power,’ according to the statement.
The Monetary Policy Committee in its outlook on the next steps the economy will take expects the momentum to quicken following a good season of monsoon. Rural and urban spending is anticipated to be the other piston of the forecasted growth. The 7th Pay Commission’s award is said to whirr up urban consumption. The Indian industry’s machines are predicted to whiz ahead with the thrust given by ‘strong public investment in roads, railways and inland waterways, and recent efforts to unclog cash flows in large projects under arbitration.’
According to the Reserve Bank’s inflation expectations survey of households, people see prices rising in the coming months.
Although slowing global growth and investment, increasing financial market risks, brightening domestic agricultural scene, and easing inflation gave the MPC to cut rate, it believes that ‘the accommodative stance of monetary policy and comfortable liquidity conditions should support a revival of credit to the productive sectors.’
The RBI spelt a pre-caution that the cost-push pressures, resulting from the 7th pay commission hand out and the rise in lending and spending will need vigilance to prevent a cost spiral rising up and up. The Committee, through its juggling, hopes to stick to a Consumer Price Index (CPI) inflation trajectory that would land at 5 per cent by March 2017.