RBI Decision ; Can it have an impact on Common Man

The recent policy decision by the monetary policy committee (MPC) not only resulted in the stock market tumbling down but also made the Indian citizens worry about his/her EMIs.The committee took two decisions:

1. Therepo rate was increased. This is the rate at which RBI lends to commercial banks. It increased it to 4.40% from a multi-decade record low of 4%. Raising the rates makes borrowing money from the central bank more expensive for the commercial banks. The banks then pass on this cost to their customers (that is the Indian citizens or corporations etc.).
2. The cash reserve ratio (CRR) was hiked. This translates into banks to parking more money with the Central bank. This in effect would drain out ₹87,000 crore of liquidity from the banking system.

The impact of these two decisions can be summed up as following:

1. Increase in repo rate would make loans expensive. This will push banks and non-banking financial companies (NBFCs) to hike not only the lending rates but also the deposit rates. Equated monthly installments (EMIs) on home, vehicle, and other personal and corporate loans are likely to rise.
2. The increased CRR would leave the banks with lesser funds to give out as loans, which would mean - taking loans from the banks may become difficult.

Why was this decision taken suddenly?

The RBI Governor Shaktikanta Das said the decision to increase the repo rate was taken keeping in mind the rising inflation, geopolitical tensions, high crude oil prices, and shortage of commodities globally, which have impacted the Indian economy.

“The persistent inflation pressures are becoming more acute, particularly on food”, said Mr Das, he further added that “ there is a risk if prices stay at this level for "too long", so"inflation must be tamed in order to keep the Indian economy resolute on its course to sustained and inclusive growth". Moreover, when inflation in March rose to a 17-month high of 6.95% and might even rise above the RBI’s target band of 2-6 percent in April too, this step was necessary.

However, one needs to ponder on few aspects related to these decisions.

1. If inflation is largely due to external factors – oil prices and supply shortages due to the Russian-Ukraine war and COVID-19 restrictions in China - so, how would raising domestic rates help reducing inflation?
2. The companies particularly the Small and Medium, have still not been able to overcome the adverse impact of Three shocks they got one after the other ; DEMONETISATION, GST and then the pandemic - the fourth quarter (2021) results are an indicator. Therefore, Will the raising borrowing costs further NOT have a negative impact on the Indian businesses.
3. Since the businesses still haven’t recovered fully, there is nothing to feel happy about the record GST collections, because, as many experts state that it can also be an indicator that this amount is largely due to better compliance and increased prices rather than the broader economic growth.
4. Amid relatively high unemployment rate, inadequate quality jobs and shrinking labour force, one needs to ask whether these steps will not impact India’s growth adversely?

Comments of few experts

1. Deloitte India economist Rumki Majumdar said the rate hike was expected in June. “The surprise move by the RBI to raise the policy rates a month earlier suggests that it does not want to wait and watch but act quickly before inflation derails the growth recovery. However, making it costlier to borrow will affect consumers and businesses (especially MSMEs) and impact credit growth, which has been low since 2019.
2. Rupa Rege Nitsure, group chief economist, L&T Financial Holdings told Reutersnews agency that the hike in repo rate and CRR are “the most appropriate steps when the nation is facing galloping inflation and a widening trade deficit”. “These are a kind of emergency measures to control extreme financial outcomes. The central bank has to take these steps to prevent an extreme fall in the value of our currency and protect financial stability”.

Conclusion

In view of the above, it is certain that although the Central Bank’s decision to raise rates was to check inflation, this may also have an adverse impact on India’s growth.

Therefore, the cumulative shock that MSMEs experienced, beginning from demonetization- GST- Pandemic  may now deepen the economic pain experienced by these businesses and the Common man alike.