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RBI doesn’t have much room to cut interest rates anymore, Goldman Sachs says

Goldman analysts say there may not be a need for any ‘further significant loosening of monetary policy stance’ unless economic conditions warrant so.

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Mumbai: India’s central bank is running out of room to ease interest rates further, but there’s little reason to worry as the current monetary policy isn’t seen as restrictive to money supply growth.

That’s the finding of a report from Goldman Sachs Group Inc. based on a study of 10 different methodologies, including various real rates of interest, inflation expectations, financial conditions, slope of the yield curve, growth of money supply and estimated monetary policy reaction time.

With the Reserve Bank of India having eased rates by 135 basis points in five moves last year, the Goldman analysts said there may not be a need for any “further significant loosening of monetary policy stance” — unless economic conditions warrant so.

“Adverse data on inflation or inflation expectations, or a renewed bout of weakness in economic activity, could trigger another cut in 2020 – but this research seems to suggest that any significant move in a downward direction would raise the risk of monetary undershooting and a policy reversal later in 2020 or in 2021,” wrote the analysts led by Prachi Mishra, chief India economist at Goldman Sachs.

The RBI has been on a pause since December after inflation spiked. Gains in consumer prices are now hovering well above the central bank’s 2%-6% target at 7.6% in January. The Monetary Policy Committee has retained its easing policy bias, while saying there’s room for future action to support the economy that’s set for its weakest expansion since 2009 this year.

For now, the central bank has adopted unconventional methods to keep borrowing costs low. In December, the RBI announced a Federal Reserve-style ‘Operation Twist’ — buying long-dated bonds and selling the shorter tenor ones. This month, it started long-term repo operations to inject $14 billion into the financial system, inspired by the European Central Bank’s use of long-term loans to banks.-Bloomberg


Also read: Funding for Lending: RBI could now turn to Bank of England for ideas to revive growth


 

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1 COMMENT

  1. 1. If there is one big section of citizen-voters in our country who will be pleased after reading the news report titled ‘RBI doesn’t have much room to cut interest rates anymore, Goldman Sachs says’ it is the senior citizens who are not receiving DA-linked pension. These seniors depend mainly on income from interest as a source of regular income. 2. With almost every rate cut announced by RBI we seniors have experienced decreasing rates of interest on different National saving Schemes and Fixed Deposits (FDs) with banks. 3. As it is, senior citizens (especially non-pensioners) are facing many difficulties with ever-rising cost of medical treatment. Further, these senior citizens (non-pensioners) have practically no protection against inflation and consequently many of them have to suffer either erosion of capital or they have to drastically cut their monthly family budget, with every cut in interest rates. 4. As everyone is aware the Union government does show concern for senior citizens and accordingly there are two saving/investment/pension schemes exclusively run for them: (1) Pradhan Mantri Vaya Vandana Yojana (PMVVY) and (2) Senior Citizens’ Savings Scheme (SCSS). PMVVY is a Pension Scheme, which is available till 31st March, 2020. SCSS is an exclusive savings scheme which is open for all for senior citizens and there is no time limit to open an SCSS account. 5. When we read news about RBI rate cut or when we read arguments made in favour of reduction in administered rates of interest on savings schemes like SCSS, we senior citizens really get scared. Here, my point is that a clear distinction has now to be made between financial needs of (a) pensioners, who receive DA linked pension and (b) non-pensioners, whose main or only source of income is interest. 6. I believe that it is responsibility of the Union government to protect interests of non-pensioners who have to face huge risk of erosion of capital with every cut in interest rates.

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