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MPC Adds Strength to Modi Govt’s ‘Low Inflation High Growth’ Model

Repo Rate Cut Modi RBI

The lowering of repo rate by 0.25% by the Monetary Policy Committee (MPC) chaired by new Governor Shaktikanta Das has clearly signalled the resolve of the Central Bank and thereby the Modi government. With this, the Congress model of high inflation low growth has been replaced by the low inflation high growth policy template. Admittedly, inflation dropping to an 18-month low of 2.19% in December last year would have been considered when this decision was made. Most importantly, the government as well as the Bank, fully understands that it is only growth, notwithstanding the former’s role in creating equity, that will lift the lot of millions still living in abject poverty and misery.

How the Move is Likely to Impact Economy?
  • Buoyed by the steadily lowering of inflation rates in the last four years on the back of lower food and fuel inflation, by easing of repo rates, the Bank has sought to complement the good work already announced by the interim budget. The said budget had pretty much kept every section of the society in mind with a long-term focus on the sustainability of the economy.
  • As a result of the shift in grading from “calibrated tightening” to “neutral” coupled with the reduction in repo rate, there will be affordable credit all around for all sections ranging from small businesses, to homebuyers, to loan-seeking students – everyone is set to be benefited. The raising of collateral-free loans of up to Rs 1.6 lakh as against Rs 1 lakh earlier for farmers will further bolster their input sourcing capabilities while cushioning them against any possible future financial risk. The earlier announcement of the farm income scheme would have also contributed to a rise in rural purchasing power.
  • Then the monetary policy making it easier for NBFCs to raise money would directly or indirectly not only help the micro finance institutions but would eventually again spill over to credit to the Self-Help Groups (SHGs) and thereby giving a boost to the rural economy.
  • In a similar vein, on the corporate front, the relaxation for foreign portfolio investors to invest in corporate debt means that the private Indian companies would have more avenues to raise capital from, which would again give an impetus to job creation and growth.
What Does the Announcement Entail?
  • Lowering of Repo rate by 0.25% to 25 percent
  • Switching the monetary policy stance from “calibrated tightening” to “neutral”.
  • Making it easier for NBFCs to raise money
  • Making it easier for foreign portfolio investors to invest in corporate debt.
  • Easing of lending to agriculture

Therefore the government through this policy has demonstrated that it is has not lost sight of the larger goal, that is, accelerating growth. It also signifies that both the government and the Central Bank are on the same page when it comes to policy making conveying a predictable and consistent policy environment in the coming future.