Repo rate is the rate at which RBI lends money to
commercial banks. Any cut in this rate, will ease stress in the economy and
increase liquidity as banks can borrow at a cheaper rate. This rate also
becomes the base rate at which banks determine their own lending rates.
A lot of experts and agencies expected a 25 basis points
rate cut, if not more. The stock markets have been rallying on expectations
that the banks might get a lease of life, amidst many problems that they face.
Yet, there are also doubts whether the benefits of this
rate cut will be transmitted by the banks to the borrowers. It has happened
many times that the banks absorbed the rate cut advantages without passing on
the benefits to the industry or the consumers.
“We expect RBI to spell clearly its stand on how a large
cut if impacted will lead to better transmission: will the banks be now
mandated for benchmarking their asset and liability moving together? Otherwise,
banks will not rate cut deposit rates given the huge currency leakage,” said
Dr. Soumya Kanti Ghosh, Group Chief Economic Adviser, State Bank of India.
The rate cut was much expected yet is believed to fall
short for a stimulus that the economy desperately needs. India’s fourth quarter
GDP numbers came in at 5.8%, which was lower than expectations. Many experts
have revised the growth numbers for the year downwards, and expect the pressure
to continue till October.
“We see further downside risks to growth as we await the
reforms to begin bearing fruit in the medium term. We expect 2019-20 GDP growth
to remain muted at 6.8%, with slowdown in the first half likely to continue and
some improvement in consumption and investment likely in the second half,” said
Upasna Bhardwaj, Senior Economist at Kotak Mahindra Bank.
As per SBI’s predictions, the growth rate will stay below
6%, at least in the first half of 2019-20 and will only recover in the second
half. “Global growth is fast turning out to be an Achilles’ Heel,” added Ghosh.
