New Delhi: To ensure better rate cut transmission, the Reserve Bank of India has requested the government to pass on the benefit to the public by reducing the rate of interest on small savings schemes including public provident fund (PPF) and post office deposits, stated a report.
After a review in September end, the apex bank had found that the government did not transmit RBI’s rate cut onto small savings schemes. The banks then contended that cutting the interest rates on small savings would prompt the depositors to transfer their money from fixed deposit schemes to small savings schemes that already come with tax benefits. Such a move would result in even higher returns, added the banks. It must be noted that the higher the interest rates, the more funds will the government be able to mobilise. Besides, higher interest rates will also ensure that the government does not resort to additional market borrowings in an attempt to clear the fiscal deficit target for the current financial year.
The repo or short-term lending rate for commercial banks was 5.15 per cent when RBI’s monetary policy committee conducted its fifth review. The key lending rates were reduced by the apex bank during the last five policy reviews in order to reverse the current consumption slowdown in the Indian economy. In fact, the apex banks’s primary objectives are inflation targeting and price control, as pointed out by RBI Governor Shaktikanta Das.
Besides, RBI had reduced the country’s FY20 GDP growth forecast from 6.1 per cent in the October policy to 5 per cent. “Interestingly, the RBI seemed content with the pace of transmission and no longer sees the transmission as staggered and incomplete,” Edelweiss Securities’ Economist Madhavi Arora.
“We think that this easing pause is temporary. Even so, our estimates suggest inflation will likely remain above 5 per cent in 4QFY20 and could constrain a rate cut in February.” Furthermore, RBI may await the budgetary announcements and the fiscal measures thereof before any decision to revise the rates.
According to Acuite Ratings & Research Lead Economist Karan Mehrishi: “At this point, an accommodative policy in pause mode appears likely till Q1 FY21. “While there may be a potential risk of a rate hike if the inflation print remains persistently elevated along with a comfortable liquidity scenario, it is likely that the MPC will abstain from such action unless there is a modest revival in growth rate.”
(With agency inputs)