The Reserve Bank of India (RBI) has decided to cut interest rates by a minimum of 50 basis points in its monetary policy review on April 5. Consumer price inflation was 5.18% year-on-year basis in February and was low although the country went through two consecutive spells of drought. Industrial production growth for a third straight month, January, called for a policy rate cut higher than 25 basis points. Such policies could only spur artificial growth. The US Federal Reserve has not any intention of hiking interest rates and so the lowering of rates in India will not lead to global outflow going up. The finance ministry has dropped a bombshell proposing to bring down interest rates on small savings schemes. There would be a 60 basis points cut on the public provident fund and 130 basis points on one-year time deposits. Since January 2015, the RBI has lowered its benchmark repo lending rate by 125 basis points. The cut has not benefited borrowers at all. Banks contend that lending rates cannot be reduced without cutting deposit rates. That is not advisable since post office schemes yield higher returns. But now the RBI cannot say that cutting repo rates is pointless.
The lowering of interest rates on small savings will draw flak from the opposition. It will no doubt hit middle class low income groups. Positive interest rates are conducive to the interest of these savers. One has to reckon with the fact that the CPI inflation has gone down to 5-5%. The poor and middle class may in the event benefit from stimulated economic activity as a result of lower interest rates. But from the common man’s angle, that is only a long term view.
