Cut in REPO

The reduction of the repo— the rate at which banks draw short-term loans from the Reserve Bank of India—by the RBI has received publicity in the media in a way that suggests it to be an epoch-making event. Reportedly the share market has got a boost, and the captains of industry are elated. It is only to be expected, because they will now get credit from the commercial banks and other financial institutions on cheaper terms. The media welcome it saying that it should boost economic growth. Of course, the media are owned by market fundamentalists, who think that wooing the corporate houses and to help them acquire land, forests and mineral resources constitute the best policy for the country's development. The emphasis on easier terms of credit has put into the backseat another important question. How many billions of rupees lent by the state-owned commercial banks have remained unrecovered? What actions have successive governments taken against those who have not cared to refund the huge amounts taken by them as loans? This question is not less important than the issue of Swiss Bank money, on which Narendra Modi's fraudulent pre-poll promise now stands exposed. Those who habitually measure the strength of the economy by the index of the share market have reasons to feel elated. But the overall impact of the reduction in the repo rate does not hold out much hope for the economy and ordinary people.

Given that large amounts of money capital are traditionally employed in trade where the pattern of control is largely oligopolistic, easier credit facilities and consequent credit expansion are well likely to strengthen the forces of inflation, aided by many structural bottlenecks and relative immobility of resources. Inflation is possibly the only unchanging feature of the economy, and higher rates of inflation hit the weaker sections most. Secondly, large numbers of retired salaried persons, having no pension benefits, depend for their sustenance on the interest earned on their bank or postal deposits. They will be hurt doubly, as both the nominal and the real value of their income will be reduced. Nominal income will go down owing to the reduction in interest rates and real income will fall with the strengthening of the forces of inflation. Broader issues like poverty, chronic hunger and malnutrition, and dehumanizing inequality should be best left unaddressed.

Vol. 48, No. 18, Nov 8 - 14, 2015