The Reserve Bank of India’s next Monetary Policy Committee or MPC meet on August 2 may bring some cheer for the consumer as the recent retail inflation, which has hit a historic low, has raised the expectation of a possible rate cut from the Central bank.
On Wednesday, it was reported that retail inflation has come down to a level of 1.54 per cent in June which may prompt the Reserve Bank to go in for rate cut next month. If the Central bank cuts the rate in next meet, it will allow banks to offer loans to consumer at a lower interest rate that could augment the market demand. It will not only raise the market demand but also bring down the interest rate on your home loan, car loan, and any other existing loans.
The Reserve Bank mainly factors in retail inflation to decide whether to go for rate cut or hold on to the current one. It is slated to meet in early August to announce the next bi-monthly policy rate. In its last policy in June, the central bank had kept the key lending rate unchanged citing risk to inflation.
Now that numbers are in markets favor, it is likely to see a rate cut in next policy meet. Chief Economic Adviser Arvind Subramanian said that the latest numbers reflect the firm and ongoing consolidation of macroeconomic stability.
“The last time we saw such inflation -according to slightly different CPI (IW) – was in 1999 and before that in August 1978,” Subramanian added. Inflation in the previous month -May this year- was 2.18 per cent.
As per the data released by Central Statistics Office, inflation in the food basket as a whole contracted further to 2.12 per cent last month as compared to (-)1.05 per cent in May. Vegetables inflation declined to 16.53 and that of pulses and products to 21.92 per cent.
How rate cut will help consumers:
A possible rate cut will allow banks to borrow from RBI at a lower interest rate which will allow banks to cut their interest rate on consumer loans.
Rate cut will also lead to a fall in EMI of existing or ongoing loans, thereby providing a boost to industry and economy in overall.
Rate cuts also allow companies to expand their operations as capital becomes cheaper, resulting in more job creations.
RBI rate cuts interest rate also create business environment as early-age start-ups can also apply for loans at a lower rate.