The Reserve Bank of India (RBI) has recently taken a crucial decision by cutting the Repo Rate by 50 basis points and the Cash Reserve Ratio (CRR) by 100 basis points. The main objective of this step is to boost the country’s economic growth. But is this just the beginning?
Soumya Kanti Ghosh, Group Chief Economic Advisor, State Bank of India (SBI), believes that if the growth rate remains weak or inflation remains low, then we may see another cut in the repo rate. This is good news for crores of common people who are thinking of taking a loan or whose EMI is linked to the repo rate.
Huge surge in demand for retail loans
Soumya Kanti Ghosh believes that the CRR cut effective from September, which is perfectly timed to coincide with the start of the busy credit season, will bring additional liquidity into the banking system.
This move could create an additional loan capacity of ₹2.5 lakh crore for banks.
As a result, overall credit growth could increase by about 13% due to retail demand.
Ghosh expects this infusion of liquidity to boost credit growth and overall economic activity, but will not lead to unnecessary asset price bubbles. He stressed that the relationship between asset price inflation and monetary policy in India is not as strong as some believe. It will encourage spending by providing affordable loans to consumers, which will brighten the market.
Government spending is expected to pick up
On the investment front, Ghosh expects public capex to remain low in the initial months, but it will pick up by the end of the year. This reflects last year’s trend of ‘back-ended push’, where government spending increased at the end of the financial year. States are also likely to increase spending on infrastructure during the same period, which will boost construction and related industries.
RBI has maintained its growth forecast at 6.5%. Ghosh believes this is achievable, but he said it largely depends on the monsoon and global growth. Ghosh’s current estimate is 6.3%, which is close to the RBI’s estimate.