After four and a half years of ‘aggressive rule’, the National Democratic Alliance (NDA) under the leadership of Prime Minister Narendra Modi, is loosening the screws to let general public have a sigh of relief. Just on the brink of general elections, the government is now seriously pursuing to woo general public through a series of relief measures.
This time it succeeded to motivate the Reserve Bank of India (RBI) to lower the policy interest rates. The repo rate has been cut by 25 basis points to 6.25%. The six-member Monetary Policy Committee (MPC), headed by RBI governor Shaktikanta Das, in the meeting held on February 7 (Thursday) also announced the limit of collateral-free farm loans given by banks to be raised to Rs. 1.6 lakh from Rs. 1.00 lakh.
Last week, the NDA government presented the interim budget unprecedentedly loaded with relief package proposals especially for lower middle class, including farmers and salaried class.
Earlier, the government had taken decisive steps to ‘reform and formalize’ the economy is now seen to be giving relief to various population segments that faced the unavoidable inconvenience caused by demonetization in 2016 in which 86% of the currency notes of Rs.500 and Rs.1000 denomination were banned and the roll-out of the Goods and Services Tax (GST) in 2017 which burdened common man and small businesses.
However, as the general elections are nearing, we witnessed tax cuts by the Goods and Services Tax (GST) Council on a host of items aimed at reducing the tax burden on consumers. Remarkably, the federal indirect tax body has in recent months been focusing more on easing the burden on consumers and small businesses than on revenue maximisation. Just at the fag end of the year 2018, it cut taxes on 22 items, out of which seven were from the highest slab of 28%.
Now after unprecedentedly presenting a pro-people budget in which salaried class and farmers have been extended major relief in terms of tax rebates and cash relief of Rs.6000 per year to farmers with less than 2 hectares of land holding, the government backed RBI decision to cut repo rate by 25 basis points is considered a bonanza for borrowers, especially home loan and consumer loan borrowers. It was in 2017 when the central bank had cut the repo rate. And during this financial year, the apex bank had kept the rates unchanged in the last two monetary policy announcements held in October and December 2018. However, the rates were hiked twice in June and August 2018.
The bonanzas extended through measures like packages announced in interim budget are being analyzed and debated by experts almost every day. Without venturing into the debate, let’s concentrate this time on the RBI’s ‘bonanza’ of rate cut.
Technically speaking, any policy rate cut means a relief to the people. Such cut in rates raises hopes of bringing down equated monthly installments (EMIs) for the millions of home loan and consumer loan borrowers, with banks expected to pass on the reduced rates to its customers.
Does this rate cut actually percolate down to customers? A Reserve Bank of India report has found banks were not passing benefits of changed repo rates to customers. Experts allege that ‘banks and financial institutions implementing interest directives has been arbitrary and discriminatory and in violation of a citizen’s fundamental rights under Article 14 (right to equality) and 21 (right to life) of the Constitution.’
Interestingly, a recent report by the International Monetary Fund (IMF) makes this point: “Pass-through to deposit and lending rates is relatively slow and the deposit rate adjusts more quickly to monetary policy changes than does the lending rate.” It has been observed that banks have been quick in passing on any rate hikes in the past to borrowers.
However, let’s hope a different scenario this time as Governor Shaktikanta Das has said he will speak to bankers to ensure a quicker and better transmission of the policy rates. He is meeting the bankers shortly.
(The views are of the author & not the institution he works for)