What Does RBI’s Projection of Lower Growth Rate & Higher Inflation Mean for The Aam Junta?

After the 2-day meet, RBI’s Monetary Policy Committee or what’s known as the MPC has kept the repo rate unchanged at 6%. Repo rate is the rate of interest at which the central bank lends money on short-term to banks. On the other hand, owing to hike in crude oil prices and increase in budgetary allocation for Minimum Support Price of Kharif crops, the central bank also hiked inflation projection for 2018 1st quarter to 5.1% from 4.7% in 17’s last quarter whilst keeping a vigilant eye. 

Now, when it comes to the common man, he doesn’t understand such profound fiscal jargons. So, what do these RBI and central bank moves mean for the aam junta?

First things first, home loans for pre-2016 borrowers will get cheaper. This is because their home loan rates have not been revised by banks in line with market rates which had earlier been speculated. Keeping the repo rate unchanged will likely lower the cost of borrowing for both individuals and corporates while also improve availability of funds bringing in more liquidity to the monetary system. With the announcement, banks may now consider lowering interest rates passing on the benefits to end users.

If you are looking to invest in your dream home, it may be time, you took the leap. Over the last few years, interest rates on loans of all varieties have been moving downhill. The latest unchanged repo rate means that the rates will continue to stay where they are which will in turn benefit prospective borrowers. This is particularly useful for homeowners who can continue to take new loans at attractive rates. Those who are currently repaying loans will continue to enjoy the same interest rate for now.

When it comes to inflation, you might benefit from asset inflation, such as in housing or stocks, if you own such assets before the price rises. As interest rates lower, more people are able to borrow more money. The result is that consumers have more money to spend, causing the economy to grow. In economics, the quantity theory of money states that supply and demand for money determines inflation. If the money supply grows, prices tend to rise, because each individual piece of paper becomes less valuable. A higher rate of inflation can make repaying loans easier because people will end up paying back less money when the interest rate is lower.

Fixed deposits rates will be stable as a constant repo rate translates into moderate and constant returns from fixed deposits. For people who are investing in systematic investment planning or SIP, their returns are expected to be stable for the immediate future. If you are looking for marginally higher returns and greater tax efficiency than fixed deposits, you can invest in liquid mutual funds and short-term debt funds, which contain securities with short maturity periods. They are low-risk and can be liquidated instantly.

In recent times, interest rates on bank deposits and small saving schemes have been moderate. With the latest reports, rates will remain where they are. If you’re looking to earn higher returns, investing in equity mutual funds should be the way to go. Equity continues to be the most attractive option for long-term savings.

In the job market as well, RBI’s statement carries some good news. Businesses carry out their expansion plans when interest rates are lower and they are able to raise capital at lower cost. When companies build capacity, more jobs are created.

All said and done, when it comes to the common man, let’s not forget the fact that India is predominantly an agrarian country with almost half of its people dependent directly or indirectly upon agriculture. Over 58% of rural households depend on agriculture as their principal means of livelihood. How does inflation affect farmers? For starters, we have not been witnessing very good monsoons in the last few years. If the crop yield isn’t good, then the demand clearly exceeds supply resulting in higher prices. The global economy, as a whole, is in a state of imbalance. With major nations in the world experiencing an economic setback, import expenses are escalating too. The ever rising costs of petroleum and crude oil have a direct impact on transportation charges. As many people live below or close to the poverty line in India, the poor pay a heavy price. With the increasing wholesale and retail margins, farmer. The condition of the average farmer remains alarming and shows little signs of improvement – a fact that is exemplified by the astonishing farmer suicide rates. 

One more thing that must be noted here is the very reason why Urjit Patel took over the reins from Raghuram Rajan after the latter’s controversial 3-year stint as RBI governor. Raghuram Rajan had brought in aggressive measures to tackle inflation and was a rockstar in the financial world, having taken on critics publicly and daring to undertake dangerous decisions. He had taken over the top job during uncertain times when the rupee was depreciating every day and inflation was in double digits. His sole focus was on making policy changes that could reduce inflation. When he wasn’t able to bring down inflation numbers, hawkish monetary policymaker Urjit Patel was brought in to fill his shoes. But did reform happen? Nope! Despite having devised the consumer price-focused monetary policy strategy to fight inflation, Patel is vulnerable in his new role. And this is clearly visible from the recent repo rate and inflation numbers.

As the effects of the twin blows delivered by demonetisation and GST wane by the day, the economy is set on its road to recovery. The government is expecting a 7-7.5% growth in 2018-19. It’ll be worthwhile to see how accommodative the RBI becomes in the near future and what stance it takes.

Share This Post

Leave a Reply