The RBI’s new monetary policy intervention may not make any impact on growth, inflation and liquidity. Only change is the 25% cut in repo rate. Banks may not make any cut in their lending and deposit rates because the repo cut is too small for them to initiate a cycle reversing interest rate cut.
Of course, the SBI, which is the price leader in the industry, was asking for a 50 bps cut to initiate any sort of action on interest rate cut. But, the 25% repo reduction is too low. Besides, the financial sector is to face tight liquidity in the coming weeks because of the closing of the financial year. This means that, there is no effect for the RBI’s last tow cuts in repo rate (25 bops each). Banks also not responded to the previous 25 bps cut made by the RBI.
But there is a chance that the Finance Ministry may compel SBI to introduce a rate cut to support growth by the beginning of the new financial year,
More surprising is the RBI’s inaction on the liquidity front. The central bank has not made a reduction in CRR to provide more liquidity given the busy financial year close. Data from the RBI shows that the banks are borrowing 1.3 lakh crore on a daily basis during the last one week through the LAF Repo route. This means that liquidity situation is tight. Here, two factors may have tempted the RBI to not go for a CRR cut. Firstly, the CRR is already at a very low ratio of 4%. Making a further cut will make it an insignificant policy instrument. Secondly, the average 1.3 to 1.6 lakh crore Repo injection is tolerable for the RBI especially considering the busy tight situation of March.
Altogether, the policy intervention is not impactful on the economy. But the RBI has little options on repo rate front given the retail inflation rate continues to hang around the double digit figure.