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Will Another Rate Cut by the RBI Help?

Professor of Financial Economics and Part-time Value Investor, Transfin.
Dec 6, 2019 5:42 AM 2 min read

The RBI is expected to cut rates once again tomorrow - fifth in a row, but to what effect?



The RBI is expected to cut rates once again tomorrow - fifth in a row, but to what effect?

Nothing Really Matters: In under a year, the Reserve Bank of India (RBI) has cut interest rates by 135 basis points and flooded the banking system with a surplus liquidity of nearly INR2tr. To top this, RBI governor Shaktikanta Das, in his last policy, had said that the RBI was willing to keep rates soft as long as it takes to revive the economy. However, this expansionary monetary policy has not really shown any palpable results. 


As per this Livemint report, the biggest challenge the Central Bank currently faces is to restore trust in its financial markets, this is, making mutual funds and banks lend to firms, including non-banking financial companies. It also needs to push banks to lower lending rates and perhaps manage market yields. Meanwhile, it will have to ensure that the INR2tr worth surplus liquidity begins to at least support the sovereign bond market.


As per popular consensus, the RBI is expected to cut interest rates again tomorrow - for the sixth straight time. But to what effect? The spread between bank's lending rates and India's key policy rate has been the widest on record this year. And as per this Bloomberg article, quantitative easing is perhaps the only remedy that can work (needless to say conditions apply.)


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