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    The RBI delivers with 25 bps cut in repo, now all is up to the rain god

    Synopsis

    Responding to the emergent situation, the Reserve Bank of India cut the policy rate by 25 basis points.

    Agencies
    The RBI pointed out in its policy review that the "private consumption, especially in rural areas, has weakened in recent months".
    The 25 basis points rate cut by the RBI leaves the ball in the rain god's court as the growth impulses within the economy weaken significantly.

    The RBI factored in the normal rain forecast by the IMD in its policy review but any effort to lift the rural sentiment will mostly come to a naught if the rain god plays spoilsport because of heavy dependence of India's rural economy on Southwest monsoon.

    Responding to the emergent situation, the Reserve Bank of India cut the policy rate by 25 basis points or 0.25 per cent making it three cuts in a row in this calendar year.

    The cut in repo rate comes amid a slowdown in the economy seen through economic growth weakening to a five-year low of 5.8 per cent in the last quarter of FY19 taking the overall growth to 6.8 per cent in the entire year.

    A slew of high frequency economic indicators have all pointed in the direction of the economic engine sputtering on account of slowing consumption growth triggered mostly by the NBFC crisis which crimped lending within the economy as liquidity dried up.

    The rural economy has been hard hit as is evident by falling demand of fast moving consumer goods and weak two-wheeler sales. The consumer goods sector had pinned its hopes on a rate cut in addition to the steps taken by the government to lift the sentiment. Speaking to The Economic Times, Dabur India's chief executive, Mohit Malhotra, said, "Higher MSPs and rural stimulus would put more money in the pockets of rural consumers and boost consumerism. The liquidity situation in the market is improving now and a repo rate cut would further improve the situation.”

    Consumption growth has been growing at a faster clip in the rural areas vis-à-vis urban areas in the last few years and to boost rural consumption the government has taken a slew of measures which is expected to bump up the sentiment.

    With the first Cabinet meeting approving the expansion of PM Kisan scheme to include all the farmers along with a higher MSP, the cut in repo rate could serve as a stimulus enough to pump prime the rural economy in the event of the rain god not playing a spoilsport.

    The RBI pointed out in its policy review that the "private consumption, especially in rural areas, has weakened in recent months". Taking into account the rural slowdown and other factors, the RBI has revised downwards its economic growth forecast for the current fiscal to 7.0 per cent – in the range of 6.4-6.7 per cent for H1:2019-20 and 7.2-7.5 per cent for H2 – with risks evenly balanced.

    However, expectations of normal Southwest monsoon will give a much needed fillip to rural demand, thereby reversing the slump.
    (Catch all the Business News, Breaking News Events and Latest News Updates on The Economic Times.)

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    4 Comments on this Story

    Sonam Sharma428 days ago
    rain god Will visit India after may2024 when inflation rate will be 21 percent and bank fd rate18 percent and repo rate 16percent, and average stock returns of minus 5 percent for next 5 years, growth rate of GDP avesge 0.5 percent under present govt
    Yeshwant Pande428 days ago
    Even the rain god is not going to help the economy as already lesser rains are predicted. It''s too much to expect from RBI and Gods when you drain 90% blood in demonetization and don''t forget that patient is alive. Who is keeping it alive if not RBI and the God.?
    Parambir Hanjra428 days ago
    Very sad to know Modi has won & bjp has lost where not a single Bhakt / mureed of Modi celebrated his victory other than bjp office people why?
    The Economic Times