Rate cut after April can get aam aadmi smiling. The fact that Reserve Bank of India on December 5 did not cut interest rates despite investor expectations tells a story of what lies ahead. All is not well for borrowers.While the economy needs lower borrowing costs, two factors could play spoilsport – rising prices and the fiscal deficit.
That the yield on benchmark government bond is at 6.59%, down 78 basis points despite RBI’s 135 basis points reduction since February, reflects market fears over GoI finances. A basis point is 0.01 percentage point. GoI overshooting its borrowing target due to lower GST collections looks imminent.
Competing with private companies for limited resources could cap the room for RBI to cut interest rates. Even if it does, market rates won’t ease due to higher government debt.
Also, with inflation being predicted to ease by the second half of 2020 towards the target of 4%, prospects for sharp rate cuts diminish.
“Our expectation of a subdued recovery and benign external sector backdrop still prompts us to retain view of 15 to 25 basis points cut, even as the risk is that we are already at the end of rate cut cycle,” says A Prasanna, economist at ICICI Securities Primary Dealership.
Is there a possibility of less burden of loan repayment outgo for the common man? Yes, thanks to the fact that most retail loans are now linked to benchmarks like repo rate or government bonds.
If RBI cuts rate after April in a limited way, then the aam aadmi could smile — even without having much to celebrate.
Source: Economic Times