Bold Steps By An Emboldened RBI

In a massive liquidity push, the Reserve Bank of India has cut the lending repo rate by 50 basis points, to 5.5 per cent. This is the third consecutive rate cut by the RBI, which felt emboldened enough to call its market intervention a bold move. The two earlier rate cuts were of 25 basis points each. The one visible fallout was the repositioning of the monetary policy stance as neutral as against the hitherto tagged label of accommodative. In other words, the RBI has signalled there is limited elbow room for further rate cuts.

At one fell swoop, the RBI has signalled to the entire Indian banking ecosystem that an era of low lending rates is on the cards. The immediate benefits will be two-fold: a) an uptick in the volume of traffic in segments such as home loans and automobile loans; b) a significant reduction of tenure in existing loan portfolios, as customers are more likely than not to keep paying the same EMIs in a bid to close out their loans in a much shorter period.

The decisive move by the central bank has to be seen against the backdrop of a 6.5 per cent GDP growth for FY 2025, which could be realised largely on account of a spurt in indirect tax accruals (GST) resulting in a 7.4 per cent GDP growth in the last quarter. Though by global standards this was deemed high, the RBI, in its monetary policy, holds good to the belief that the Indian economy is robust enough to grow by 7.5-8 per cent and this repo rate cut will push the economy into a higher orbit.

Clearly, today’s interventional move by the RBI to boost liquidity in an economy with the girth and potential that India offers is also aimed at piquing the interest of transnational investors. They would loathe to believe that they would miss a trick by ignoring a nibble at multiple Indian portfolios, especially the upcoming CRR cut by 100 basis points from 4 per cent to 3 per cent. Coming in four tranches of 25 basis points each over successive fortnights starting September this year, this alone is expected to release Rs 2.5 lakh crore into the economy. Even the consumer price index-linked inflation has fallen from 4 per cent to 3.7 per cent, keeping the economy on a roll.

The big question, therefore, is, will this macro-level positioning of India’s monetary canvas lead to real-life changes for the bulk of Indians who still cannot earn more than $3,000 in FY 2025? Having played a critical role in keeping the country’s per capita income pegged at around $2,880, will they benefit in any manner from this 50 basis point rate cut?