Rate cut to boost economy, make loans cheaper: Piyush Goyal

piyush-goel-addressing-jain Finance Minister Piyush Goyal addressing reporters | Arvind Jain

After a 25 bps rate cut prompted by the Monetary Policy Committee (MPC) of the RBI, the government on Thursday said the rate cut would provide a boost to the economy and help improve demand in the new fiscal, starting April. The MPC also unanimously decided to ease their inflation control measures.

“RBI's decision to change the repo rate by 25 basis points, from 6.5 per cent to 6.25 per cent, and changing stance to 'neutral' will give a boost to the economy, lead to affordable credit for small businesses and homebuyers. It will further boost employment opportunities," said acting finance minister Piyush Goyal, who is facing heat on the issue of missing jobs data in the union budget.

With the prospect of loans becoming cheaper, most bank stocks reacted with a fall of almost half a per cent of their listed prices on bourses. Later in the day, Goyal said that the rate cut would also impact bank's business by boosting demand in the economy.

"Banks would come out of trouble faster this way. Cheaper loans would boost demand and already banks are witnessing a rise in credit growth rates," said Goyal, expounding on the benefits of the rate cut.

The ministry is also gleeful about one more fact. "I think the decision to allow Foreign Portfolio Investors (FPI) was a timely thing to do," said Subhash Chandra Garg, secretary, department of economic affairs (DEA) at the finance ministry. The RBI, in December 2018, had decided to not allow FPI holdings in any corporate bond over the extent of 20 per cent.

Though the MPC reversed the decision in today's meet, broking firms are of the view that removing cap on FPI participation may not alter the dynamics much. "Already FPIs are on a big exit mode owing to reasons in the US, Europe and elsewhere. So far nothing has indicated that they are majorly interested in Indian markets. So, the intended move to remove the cap may not work at this time," said Dharmakirti Joshi, chief economist, CRISIL Ratings, in a note.

Among other things, the MPC also decided to set up a task force on offshore rupee markets, which would explore possibilities of an offshore rupee market in-depth and recommend policy measures which factor in the stability of rupee.

The panel would be comprised of members from the RBI and the government. Its setting up is in consonance with an earlier MPC decision to frame rules for the participation of rupee in foreign exchanges market.

The industry, however, said that the rate cut may have come a bit below their expectations. "We remain hopeful that this change of stance will allow for further rate cuts going ahead," said Rakesh Bharti Mittal, chairman of CII, after the rate cut was announced.

"We do not foresee much impetus coming from external sources of growth as the global economy continues to show signs of moderation. In such a scenario, all levers must be used to strengthen India’s domestic economy through greater consumption demand and investments," said Sandip Somany, president, FICCI.

Banks, however, were denied any more access to cash at the moment by the MPC, which had kept the cash requirement of banks CRR, unchanged at 4 per cent. "This would mean that banks are still required to utilise the cash already circulating in the monetary system," said Naresh Makhijani, partner and head of BFSI, KPMG India.

The last RBI rate cut did not prompt banks to reduce lending rates. Many in the FICCI said they hoped the rate cut would translate to cheaper loans for the industry, as well as for consumers.

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