The Reserve Bank has taken some new steps this time to deal with the economic slowdown or sluggishness, which is unprecedented in many ways. One of the arrows in the quiver of the Reserve Bank is that one should indicate the reduction in interest rates. There is a simple logic behind this that if there is a reduction in interest, then the cost of all goods will be reduced. If the cost is low, the demand will increase and the economy will improve. But one thing has come to the understanding of the Reserve Bank that this arrow is not hitting the target. Despite the reduction in interest rates by 135 basis points in about a year, ie if the interest rate was ten percent, then bringing it to 8.65 percent, the situation is not improving. So the bank has changed the strategy a bit.

Now the bank will issue RAPO loans for a period of one year to three years. Broadly, it can be understood that the Rappo loan is given by the Reserve Bank to commercial banks. Currently, the maximum limit for Rapo is 56 days, that is, banks could take Rapo loan from the Reserve Bank for 56 days. Now this time limit has been extended to one year and three years. The rapo rate has not been changed, it is only at 5.15 per cent, that is, banks can take loans at 5.15 per cent per annum and give it more expensive rates. Now, an amount of about one lakh crore rupees will be added to the system. If you get funds on less debt, then banks will have the option to earn by lending further. That is, banks will be motivated to lend more money, and if the lending market for everything increases, then the sale of all items will increase. Overall, the effort is to strengthen market demand.

This time the Reserve Bank has acted on a very different kind of trick. This can be called the constructive use of CRR i.e. Cash Reserve Ratio. CRR is called the cash reserve ratio in Hindi. Actually, banks have to keep four percent of their deposits with the Reserve Bank in the form of cash, on which no interest is received from the Reserve Bank. That is, the higher the CRR, the more funds of the banks will be with the Reserve Bank. The lower the CRR, the more the funds will be with the banks for further lending etc. This time the Reserve Bank has done that between January 31, 2020 to July 31, 2020, the money that banks will give as retail loans, auto loans, housing loans and small scale industries loans will be exempt from CRR. For example, if the bank deposits are hundred rupees now, then four rupees will go to the CRR and the banks will have Rs 96 left. Now after the Reserve Bank’s announcement, if Rs 20 retail loan in 100, If gone as auto loan, housing loan and small scale industrial loan, then CRR will be levied on the remaining Rs 80, ie Rs 3.20. That is, there will be pressure and motivation on banks to give maximum amount as retail loans, auto loans, housing loans and loans to small scale industries. On the one hand they will have more loanable funds and on the other, sectors like housing and auto industry, which are suffering from recession, will get some relief. This is a great idea. See how it lands. Areas such as the auto industry will get some relief. This is a great idea. See how it lands. Areas such as the auto industry will get some relief. This is a great idea. See how it lands.

The Reserve Bank is getting the problems of small industries right. The flow of credit from banks is not going much towards small enterprises. The new thinking of the Reserve Bank will bring new results, only then it will make some positive sense. There is also a compulsion to move towards this new thinking process. According to the Reserve Bank’s own estimates, the consumer price index is expected to be above 6.5 percent during January-March 2020, which is above the limit set by the Reserve Bank (between two percent and six percent). Logically, the Reserve Bank cannot take the risk of lowering the interest rate when the inflation rate is going above the RBI norms, because the reduced interest rate again increases the risk of inflation. The Reserve Bank estimates that consumer inflation will fall to 3.2 percent in October-December 2020. Wishing that onion crop does not collapse due to continuous rains like 2019,

While it is not possible to reduce the interest rate overall, the RBI has devised some tricks to provide some relief to select industries, which are suffering from recession. CRR-free loan is the link in this regard. The thing to note is that this type of medicine does not become necessary and all other industries also do not demand this medicine. The issue of auto sector slowdown in recession-hit industries is somewhat more complicated. At the moment, when the cars made in China are running in India, the question is that the recession is seen in the car industry, how much is the effect of net demand and the role of sluggish growth of cars? Chinese cars are selling, not Indian cars, then the solution to this puzzle will not come out of cheap loans alone. If someone will buy Chinese car by taking cheap loan, then the slowdown of Indian cars will not go away. Means the auto sector, And Indian auto companies in particular should be complacent. The Reserve Bank’s interest policy can only help them to an extent. Internal quality issues have to be resolved by the companies themselves.


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