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The Big Picture – RBI rate cut: What will be the impact?

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Summary:

After months of all round demands for the repo rate cut, the RBI governor has finally obliged.

The rate cut is accompanied by other positive indications in the economy like easing inflation, narrowing trade deficit and recovering industrial output. These send strong signals needed for the economic recovery.

The main reason for the cut was the change in the inflation trend. Inflation has come down largely because of fall in international oil prices.

This move has sent a signal that there is a firm case for the economy to rebound.

Central bank has clearly indicated that the fiscal position matters while announcing such rate cuts. The government has assured that it will stick to the 4.1% fiscal deficit target.

There is a need to reduce revenue deficit further and decrease the interest rates to increase the investments in the industrial sector.

An optimal policy, wherein revenue expenditure is reduced and capital expenditure is increased, is the need of the hour.

Interest rate channel, at present, in India is very weak.

The complete benefits of the fall in crude oil prices have not been passed on to the consumers. And experts suggest that this gap can be utilized to manage the subsidy burden.

The fertilizer prices also have fallen globally. And to this extent the subsidy burden of the government is expected to go down.

Service tax collections of the government have been weak and disinvestment targets have not been met. Non tax revenues are going to go up this fiscal year in a weak way.

The government has been planning for a sharp expenditure cut to keep the inflation down.

Despite decline in the nominal GDP growth, the government borrowings have not been reduced.

The decline in oil prices is likely to endure for another year. This helps the government to repair its balance sheet considerably.