The Reserve Bank of India (RBI)’s decision to cut repo rate on Tuesday would further bring down interest rates to stimulate economic activity, the finance ministry said on the central bank’s first bimonthly monetary policy statement for 2016-17.
RBI lowered its main lending rate by 25 basis points to 6.50%, in line with market expectations. It also said the monetary policy would remain accommodative, raising the prospect of another rate cut later this year if retail inflation remains under its 5% target for March 2017.
“RBI actions on Tuesday are welcome. Obviously, we believe that the rate cut which has been effective would be a good stimulus for the economy,” minister of state for finance Jayant Sinha said.
Pitching for reduction in interest rates, finance minister Arun Jaitley had said on Monday high rates could make the economy sluggish.
“Some banks have already reset their interest rates taking into account the marginal cost of lending (MCLR), and consequent to the RBI’s announcement, the banks will perhaps need to do some more transmission of reduction of policy rates of RBI,” economic affairs secretary Shaktikanta Das said.
Banks have cut interest rates by 25-50bps on account of the shift to MCLR last week.
The Budget has taken various fiscal and reform initiatives, creating space for monetary easing, Sinha said. “In coordination with the RBI, we really have to amplify both fiscal initiative and monetary initiative that are now in the pipeline. That really is what we are working in right now as if we do so, we will provide a boost to the economy,” he said.
The government has been stressing the need to make India a low-cost economy to boost job-creating manufacturing activity. “We have already highlighted that the introduction of goods and service tax (GST) will significantly bring down transaction cost and the cost of manufacturing. We are also looking at low interest rate regime, so that, there is more investment in manufacturing and infrastructure,” Das said.
* Pitching for reduction in interest rates, Jaitley had said on Monday high rates could make the economy sluggish
* Banks have cut interest rates by 25-50bps on account of the shift to MCLR last week
* In coordination with the RBI, both fiscal and monetary initiatives have to be amplified