Rate cut unlikely to stimulate growth in near term: India Ratings

A rate cut by the RBI in the second bi-monthly monetary policy statement for 2019-20 is unlikely to stimulate demand in the near term due to the absence of quick resonance in the financial market, India Ratings said in a report.

There is widespread expectation that the central bank would cut policy rate Thursday to prop up growth which has hit a five year-low of 6.8 per cent in FY19.

Despite the RBI cutting policy rate by 50 basis point so far in 2019, banks have not adjusted their lending/deposit rates accordingly. On the contrary, a number of banks have raised their deposit rates to mobilise funds, the ratings agency said.

At the core of this mismatch between the RBI's action and the banks' inability to pass on the benefit to the borrowers is the slowdown in household savings, it said.

"Increased government borrowing and elevated small savings rate have rendered deposit/investment mobilisation by banks/NBFCs expensive. Also India's consumption demand is still not a pronounced credit fuelled or leveraged demand," it said.

However, it said more than the rate cut, it is its transmission into the economy that has emerged as the bigger challenge.

It is well known that the impact of the monetary policy on the Indian economy is felt with a significant lag, but the situation at the current juncture has become further complicated due to the ongoing crisis in both the banking and the shadow banking sectors, it said.

While banks are struggling with high NPAs, NBFCs are struggling with solvency issues leading to credit freeze, it added.