RBI likely to indulge in further rate cuts!

By | March 25, 2013

The supreme monetary authority of India, seems to be shifting its focus to the revival of growth, and is taking steps in the relevant direction. It hasn’t been much time since the first cut of 0.25% in the repo rate was implemented, and the RBI is already contemplating another cut of the same proportion in the near future.

Repo rate is the rate at which banks, avail short term lending from the RBI, and a reduction in it leads to the banks being able to borrow larger funds at a lower rate, which in turn leads to a significant increase in the liquidity in the banking system.

The primary aim of the policies of the apex organization has been the moderation of inflation rates, which had risen to alarming levels in 2010. Since the inflation levels have subsided, the Reserve Bank can afford a gradual shift to the aim of reviving growth in the Indian economy. The recent hike in the diesel prices and power tariffs is bound to increase inflation in the coming fiscal year, which can prove to be the stimulator to another rate cut, which may be twice the amount mentioned here. A rate cut of 25 bps in June, and another one of 50 bps by the end of the next financial year, is definitely on the cards, because of the change in the priorities of the organization.

The change in the orientation of the policies has come after the economy registered a meager growth rate of 5% in the current fiscal, which was India’s lowest in the last 15 quarters. While this newly found vigor for reviving the growth rate, has helped the RBI improve the sentiment of the market significantly, these policy changes alone wouldn’t be able to revive the interest of the global investor as important political factors like the 2014 polls, would play a major role in improving the investment scenario, thus shaping up the future of the amazing growth story of the world’s largest democracy.

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