Union Finance Minister Arun Jaitley on Tuesday welcomed the Reserve Bank’s decision to reduce the repo rate to 6.75 per cent from 7.25 per cent but, is bad news for individuals, especially savers, he indicated that bank deposit rates and small savings rates are set to get lower too.
Chief Economic Adviser Arvind Subramanian indicated that Government could lower its GDP growth projection for the current year, following the Reserve Bank’s revision downwards of its forecast, also announced in Tuesday’s Monetary Policy statement, to 7.4 per cent from the earlier 7.6 per cent.
In view of the lower interest rates regime in the economy, the Government will review those rates it administers such as on the small savings, said Mr. Jaitley, responding to the Monetary Policy announcement made earlier by the Reserve Bank. Reserve Bank’s action signals that inflationary pressures have moderated significantly and are within its comfort zone and that it is able to provide policy support to the real economy and help its recovery, Mr. Jaitley told reporters. “The rate cut, combined with actions taken and planned by the Government, will help boost confidence and investment, and help realise the economy’s medium-term potential growth rate.”
Constant vigilance is warranted on the inflation front, he said. “Government is committed to meet its fiscal deficit target to consolidate the gains achieved in reducing the inflation.”
He further said, according to the official release, that Indian companies would now be able to raise External Commercial Borrowings (ECB) through rupee denominated offshore bonds with no end-use restrictions. This, he said, would provide additional source of raising resources which would be fully hedged as they are denominated in rupees.
Dr. Subramanian said that the transmission of rate cut is partly by the banks and partly by the market rates coming down. He reiterated that the Government looks forward to the transmission of these cuts to the rest of the economy and will work to facilitate this transmission, including by reviewing the framework of small savings.
He said that the Government would review the GDP rate target for the current financial year after the figures of second quarter are available.
Separately, Coal & Power Minister Piyush Goyal told reporters: “I am sure it will give renewed thrust to growth, to industrialisation, to attracting capital to invest in India and give a big boost to the housing sector…I have a role to play as also mention by the Governor in the resolution of discoms on which we are working resolutely.”
Economic Affairs Secretary Shaktikanta Das said that the Medium Term Framework for FPI investment in Government Securities would bring in predictability for foreign investors.
He said that the limits would be increased from existing 3.8 per cent to 5 per cent of the outstanding stock of Government Securities by March 2018 implying increase by about Rs.1.20,000 lakh crore from the existing limit of Rs.1.54 3,500 lakh crore.
He said that in the current financial year, Rs.26,000 crore would flow in the Government Securities. He said that the increase in FPI limits would bring in greater foreign participation with predictability and would result in higher liquidity in the Indian Government-Securities market.
He said that for State Development Loans, FPI limits have been fixed for the first time at 2 per cent of the outstanding stock that would amount to about Rs.50,000 crore by March 2018 and Rs.7,000 crore would flow in State Government Securities during the current financial year. This would bring higher liquidity in these State Government bonds.
N. Anand writes from Chennai
AIBEA opposesAll India Bank Employees Association (AIBEA) flayed the cut in interest rate saying it was not at all good and was done to please big corporate clients.
The Association General Secretary, C.H. Venkatachalam said that bowing to the pressure from the corporate clients, the banks might cut interest rates immediately, but they will not pass it to retail clients.
“Banks need more money to improve their business. This will work against deposit mobilisation and push up cost of acquiring funds. This will affect bank’s profits. Hence, it could have been avoided,” he said.
