What is the effect of the 0.5% rate cut by RBI?

What is the effect of the 0.5% rate cut by RBI?
What is the effect of the 0.5% rate cut by RBI?

PerformanceGurus Staff

This blog reflects the questions of a reader who read our article Rajan cuts rates. Views from economists and others welcome.

What are all could be the stated objective for the rate cuts? It could be:

  1. Chain reaction by bankers would make the enterprises more financially resilent
  2. Help them to be more competitive
  3. The chain reaction would result in producing prices going down, consequently increasing the consumption

What is the reality?

  • The chain reaction stops with the bankers reducing the prices. Of course it helps the enterprises to be financially more resilent and competitive. However the consumption does not go up on account of rate cut as the end prices for the customer remains the same.
  • When the bottom line of the company is good, the directors take a big share and leave the company in the same shape is it existed before the rate cut.
  • Most of the large enterprises are controlled by individuals whose stake in the company is not big enough. Consequently citing that it is a publicly held company, the directors refrain from giving personal guarantees to the bank.

The result is obvious. Profits to me and loss to you… that is to the Bankers. Instead the bankers should not reduce the interest rates and build resilience in the bank by increasing their spread, to accommodate their Non-Performing Assets (NPA) issues which are caused by these enterprises.

The interest rate cut actually penalizes the pensioners, especially the people who work with private enterprises and are hence not covered under pension schemes. Of course pension receivers by virtue of their employment with the Government have no problem as the pension goes up in line with the cost of living. It seems to be taking out the money from savers and putting in the pockets of enterprise owners. This maybe over dramatization but the truth is that it affects a large population. How the Finance Minister alleviates this remains to be seen.

Unless the stake holders are held legally and personally responsible for their loans, rate cut beyond a point will not work.

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