RBI on interest rate cuts

What is the issue?

The Monetary Policy Committee (MPC) of the Reserve Bank of India (RBI) is planning for a cut in the interest rates.

What is Monetary policy committee?

• The Finance Act 2016, provide a statutory and institutionalised Monetary Policy Committee for maintaining price stability.
• The MPC has the task of fixing the benchmark policy rate (repo rate) required to contain inflation within the specified target level.
• There are six Members of Monetary Policy Committee, three Members will be from the RBI.
• The other three Members of MPC will be appointed by the Central Government.

What are importance of interest rates?

• A change in the interest rate has consequences for the exchange rate, which has effects on inflation, investment and growth.
• India’s “import-oriented” growth strategy is based on availability of foreign finance.
• The interest rate has a greater importance in sustaining inflows of foreign finance.

What is the present need for rate cut?

• The core inflation and inflationary expectations are high.
• A lower interest rate is expected to revive investment or increase capacity utilisation.
• Companies are debt-laden and banks are burdened with non-performing assets.

What will be consequences of reduced interest rates?

• The inflow of foreign finance is most likely to decline, this may result in a serious depreciation of the rupee.
• This would threaten to increase inflation, bring insolvency to companies that have borrowed in foreign currency.
• There will be negative impact on manufacturing.
• There are chances of economic slowdown.

How the issues can be addressed?

• A transition from foreign finance-led growth to growth driven by both exports and domestic demand is required.
• The policy focus on achieving current account surplus is needed.
• Import-dependence of manufacturing sectors need to be curbed.
• Growth of domestic demand can be fetched from income growth in agriculture.

Source: Business Standard