RBI Interest Rate Cut Streak Ends for 2017?

Reserve Bank of India shows no sign of interest rate cut offs in its February briefings led by Governor Urjit Patel. The repo rate remains the same which was expected a little reduction citing demonetization. The demonetization move quashed Rupee 500 and 1000 notes which led to a huge deposition of these notes in the banks. It was expected that the RBI will reduce Repo rate as compensation to people who have suffered during the demonetization move.

Reasons for Expectation:

The small and medium size enterprises suffered heavily during this move and therefore it was expected that a fair cut in Repo rate will give some incentives to these enterprises. It should be noted that the Government of India in its annual budget reduced the income tax rate by 5% to 25% which was 30% earlier.

Why No Interest Rate Cut?

 The Monetary Policy Committee cited global reasons for keeping the repo rate unchanged. Officials cited Brexit, Trump factor and rise in oil prices as the reason for keeping it unchanged. RBI also reduced the expected growth rate to 6.9% which was earlier 7.1%. The RBI reduced repo rate by 25 base points on October 04, 2016 and since then it remains unchanged

After the normalization process, it is more likely that the growth rate will get back to 7-8% but the RBI needs to reduce the repo rate in order to give commercial banks a fair chance to reduce interest rates further for SMEs and other start-up enterprises. India needs a lower repo rate in order to achieve its desired result. India lacks in infrastructure and employment and without lower interest rates both these problems are tough to solve.

The loan for doing business is 12-14% which is quite high and is a bigger hindrance for domestic entrepreneurs despite government’s positive move to help entrepreneurs. A fair reduction in repo rate in the upcoming quarters can boost the Indian economy given that RBI’s autonomy remains intact.

Conclusion:

After analyzing the current situation, it is unlikely that the repo rate is going to get reduced in the days to come. After the demonetization shock this is the time for normalization. Reduction of repo rate by few base points in the last quarter of 2017 is what one can expect from RBI in order to boost growth rate.