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

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

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.

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