Will RBI’s New Monetary Policy Change Economic Weather?

RBI’s latest policy announcements are making news. What are they implicating exactly? Read and find out below

‘Covering Up’ is a very powerful technique these days and those who master it, are able to smartly avoid embarrassment. Probably this is the technique that our government is trying to master as well. Although, sometimes it gets lucky and others cover up on behalf of the government. And, we are telling you all this because the government has got lucky once again.

After facing backlash post recent Union Budget, the government got slightly lucky as RBI made Monetary Policy announcements a few days back. Let’s not even call them announcements; they were drizzles of relief for the banks and in turn for the common people.

Those announcements had such an effect that the very next day State Bank of India (SBI) reduced interest rates on home loan and auto loan. What exactly were the announcements? Read on to find out.

CRR No More…

In the ‘out of the box’ monetary policy, RBI has announced that banks will not need to maintain current reserve ratio (CRR). Basically, redundancy has been checked in this case. Here’s how. Banks had to keep aside a cash reserve of 4% for each home or auto loan sanctioned. So, this was like pay yourself an amount of Rs. 4 as you lend Rs. 100.

With this announcement RBI tried to boost up the lending spirits of the banks. This might have started working as well because the very next day, SBI reduced interest rates on home and auto loans. This is interesting because RBI did not reduce the repo rate and took an alternate route to enhance lending.

RBI Goes West

India is not known for being creative because usually most of the good things are copied from west. Once again, India is copying it from the third world (European Central Bank) and this time it’s none other than the supreme banking body RBI. We are not criticizing RBI for this because ultimately, it’s the country’s economic welfare that matters.

Let’s come to the point. RBI has announced that effective from February 15^th, it will introduce long-term repo refinancing operation. What this means is, RBI will inject up to Rs. 1 Trillion via one-year and three-year long term repos. This will potentially allow banks and other financial institutions to borrow cheaply from RBI. This in turn may result in increased lending.

Ultimate Objective - Consumption

Our economy has seen a downturn in the recent past and it has still not revived. According to economic experts, the Indian economy is currently in need of a consumption wave. If you read the new RBI policy between the lines, you’ll see that it’s targeted towards exactly that.

However, conditionality is attached to it as well. If the RBI would have directly reduced repo rate, it would have been mandatory for the banks to reduce the interest rate. However, now since that’s not the case, it is completely over to the banks whether they would pass on the benefits to the consumers or not.

The analysts are claiming the announcements as ‘Budget 2.0’. But, the effect of these announcements won’t be visible immediately. Will these announcements actually cover up for the not so rewarding Union Budget? We’ll have to wait and watch.

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