Reserve Bank of India governor Shaktikanta Das is expected to meet bankers this month to talk about issues which impede quick transmission of monetary policy changes. Following a reduction this month in the central bank’s policy rate by one-fourth of a percentage point to 6.25%, attention turned to transmission of this signal to economic activity. Of all the channels through which RBI’s monetary policy signal is transmitted, banks remain the most critical. However, this channel has been clogged for a while on account of bad loan problems and other systemic issues. Bankers argue that deposits, which make up about 90% of their liabilities, are largely at fixed interest rates. This imparts a significant degree of rigidity in the system. Consequently, transmission is slow. Bankers say that it’s not possible to transmit a softer interest rate regime on account of the rigidity in their funding sources. However, this situation does not prevent a faster transmission in … [Read more...] about Weak signals: For rate cuts to be effective, improving monetary policy transmission is essential
Rbi rate cuts
Reserve Bank of India’s monetary policy committee on Thursday lowered its interest rate by 0.25%, triggering hope that it may lead to a reduction in EMIs for people who have home or vehicle loans. In the past, this hope has not been realised because banks use opaque internal benchmarks for floating rate loans. To ensure retail borrowers get a fair deal, RBI in December had announced that by April 2019 banks would have to shift to external benchmarks for floating rate loans. The aim is to bring transparency and let the market decide the interest rate. Even though India has transitioned from a system of administered interest rates to market-determined interest rates, retail borrowers are stuck in the past. This is entirely on account of banks being allowed to operate in an opaque manner. Attempts to introduce transparency in setting the benchmark on floating rate loans have failed. However, by insisting that banks set the benchmark according to an external market-determined rate, … [Read more...] about For lower EMIs, RBI needs to ensure banks follow its regulation
Reserve Bank of India’s monetary policy committee, chaired by new governor Shaktikanta Das after the resignation of Urjit Patel, lowered policy rate by 0.25% to 6.25% and also switched the monetary policy stance from “calibrated tightening” to “neutral”. In a linked development, changes were initiated to make it easier for NBFCs to raise money and also for foreign portfolio investors to invest in corporate debt. Lending to agriculture too was eased. The sum and substance of these changes is that monetary policy’s immediate focus has changed from prioritising inflation control to supporting economic growth. The underlying driver for change in policy emphasis is that RBI has lowered its inflation forecast for 2019-20 – it’s expected to range between 3.2% to 3.9%. Inflation data, however, presents a hazy picture. Collapse in food prices which continue to “surprise” RBI has dragged down headline inflation. The puzzling trend has … [Read more...] about Shaktikanta flips: Policy rate cut, monetary policy shifts emphasis from curbing inflation to supporting growth
By Manoj Kumar NEW DELHI (Reuters) - The Reserve Bank of India's surprise decision to cut interest rates for the first time in 18 months on Thursday is a pre-election stimulus gift from a compliant central bank for Prime Minister Narendra Modi. But businesses and farmers - and even some of his own supporters - say it may be too little, too late to help the economy ahead of voting, which must be held by early May. The quarter-point reduction in the benchmark repo rate follows intense pressure late last year on the RBI to listen to government and business concerns and ease monetary policy. The threat to the central bank's autonomy led to the departure in December of its governor, Urjit Patel, and his replacement by Shaktikanta Das, whose views were much more in line with the Modi administration. There have been signs that Modi's support has crumbled in parts of a countryside that supported his Hindu nationalist Bharatiya Janata Party (BJP) in the last election in 2014. Among the … [Read more...] about India’s central bank delivers a pre-election rate cut gift to Modi but is it enough?
By Bloomberg Tues., Jan. 15, 2019 Central banks enter the new year under pressure from investors to rethink just how aggressive they can be hiking interest rates. A slowdown in the world economy, the trade war and skittish financial markets are forcing policy-makers including Federal Reserve Chairman Jerome Powell to express fresh caution about their scope for tightening monetary policy. The People’s Bank of China is also pledging support for its economy. That outlook marks a change from last year where a majority of central banks raised rates and the European Central Bank ceased buying assets. Of course, if economies weather the latest challenges, policy-makers may need to rethink anew. What Our Economists Say: “Heightened uncertainty about the trajectory for policy normalization and reduced divergence between the Fed and the rest are set to characterize the 2019 central bank outlook.” — Tom Orlik Here is Bloomberg Economics’ quarterly … [Read more...] about When it comes to rates, what are central banks going to do next?