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Why rbi not cut int rates on 7/12/16

raviteja c (article student) (8 Points)

08 December 2016

RBI announced monitary policy as on 7/12/2016. But it has not cut the interest rates.

The banks have huge money in the form of deposits. Due to the demonitisation several sectors are get affected for example :- Real Estate Business. To encourage these sectors RBI must infuse the money to the public, then it must cut the interest to infuse that money in to the public.

Where is the support given to the public and Industry without even cutting the interest rates. They are convenienced their decison by simply saying they are hoping the crude oil prices will raise. It can stabilizes the economy.

Is the decison taken by the RBI correct?

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Ashish Aggarwal (manager) (27 Points)
Replied 08 December 2016

to me it is a correct decision due to following reasons:
1. if you see the real interest rates in the fixed income securities have already reduced by nearly 50 bps even without a rate cut purely due to liquidity. so effective interest rates for borrowers is already low.
2. Fii flows have been consistently negative since November 9. at one end Us Treasury yields have increased and real rate of interest in domestic market has decreased. the spread after accounting for currency depreciation has become negative for FIIs. had there been a more rate cut it could have been a selling trigger for FIIs in indian markets. it was a good thought to wait for fed policy which kanon december 14 and then take a call on rates.
4. there is no credit expansion in the country due to demonetization. no fresh credit is being taken. a rate cut would have been only used by banks to shield their NPA losses and might not have been actually passed on to customers. last one year rate cuts have not been entirely passed on while deposit rates have been cut by the banks.

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