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Economics Club
ARTICLE SERIES – 2

Aug 11 – Aug 17 (2019)

 Economics Club
Rupee’s downfall worsens in August
On July 31, the rupee closed at 69.405 to a dollar. Fast forward to 15 August, and it was 71.532. That’s
approximately 3.2% decline in the value of rupee in just over 15 days. This makes our currency the worst
performer across the continent. But why is this happening? Well, let’s connect the dots.

Investors around the world are becoming cautious because of the global economic slowdown. Numbers
aren’t giving any cheer, and the uncertainty around the US-China trade war makes it even worse. In spite
of all this, India offers a relatively better rate of return as compared to several other nations, some of
which, offers a negative yield. But RBI cut its benchmark repo rate just a week ago by 35 bps. This,
coupled with the instability in the nation due to Kashmir decision, does not bode well for investors looking
for opportunities in the Indian market.

All of this triggered a massive sell-off in the Indian equity market with FPIs selling $1.6 billion worth of
equity in just August itself. Where is the money flowing to? One answer can be safe assets like bonds and
gold (prices are at a six-year high) which are considered as safe-haven assets.

So, what does the future hold now? Well, there are no clear signs of relief or optimism in the market. One
thing that can probably work in favor of India is a positive looking policy from the finance ministry intended
towards foreign investors.

Ali Pulavwala MBA1

 Economics Club
Policy cut Transmission
Following the meeting of MPC on August 7, the RBI in its fourth consecutive cut lowered the repo rate by 35
bps to 5.4%. But a rate cut is only effective if commercial banks cut their lending and deposit rates and pass
on the benefits of lowered rate to their customers (known as TRANSMISSION).
Transmission of rate cuts has always been a challenge for the government. Since February, the RBI has cut
repo rate by 75 bps (excluding the latest cut of 35 bps), but the transmission has happened for only 29 bps.
The major reason for such a sheepish response by the banks is reduced difference between the deposit
rates and credit growth rates. Lower growth rate numbers coupled with lower deposit rate puts pressure of
the banks to maintain their steady operating margins. Moreover, the interest rates in small saving remain
high, which makes it all the more difficult for the banks to cut their deposit rates. Both the factors have limited
the transmission of rate cuts in the same proportion. Also, the quantum of funds sourced by the banks
through the repo window is small as compared to the funds from the bank deposits. Therefore, it becomes
practically unviable for the banks to borrow from the RBI and simultaneously maintain a 4% CRR carrying no
return whatsoever.
Though the ultimate aim of such rate cuts is to boost consumption, growth and investment numbers in the
economy, recent rate cuts have not been entirely successful in doing so because of poor transmission record
of the banks. Therefore, to restore customer confidence and boost private investment before the festive
season kick-starts in September, commercial banks should work in tandem with the central bank to
successfully transmit the benefits of repo rate cuts to the ultimate consumers.
Kartik Singhal MBA1
 Economics Club
Federal Reserve Rate cut
The Federal Reserve cut interest rates by 25 bps, citing “Signs of a global slowdown, simmering U.S.
trade tensions and a desire to boost too-low inflation in explaining the central bank's decision to lower
borrowing costs for the first time since 2008.”

This is supposed to be a precautionary move to respond to weakness in the global economy, which could
potentially hit demand for US Exports and slow the internal economy. Furthermore, since most nations had
already cut their interest rates in anticipation of a Fed cut, not following suit would have led to a
strengthening of the dollar and a reduced demand for US goods abroad.

Lower interest rates prompt more spending by the Fed on government securities (Quantitative easing)
which in turn increases the money supply.

Under attack from Donald Trump since the last two months, the chairman of the Fed, Jerome Powell,
continues to attract criticism as the white house desires a greater cut, to boost business sentiment despite
indicators like employment and stock indexes being at an all-time high.

While the Fed doesn't have enough powers by itself to stave off a recession, another rate cut is expected
in the future to counter investor pessimism and global slowdown.

Udit Miglani MBA1