Inflation Softened Post Demonetization in India, Cut In Repo Rate & New Denominations Are Here

Going to the ATM in India to withdraw money and find only denominations of Rs. 500 or Rs. 2000 to be available for withdrawal, had become really infuriating as having change money was a pain in the neck. In a move to bifurcate the need to exchange change, the daily commodities were purchased in bulk so that they consumed at least Rs. 300 out of 500 and it was easy to convince the shopkeeper for the change.

The credit to this situation goes back to November 8, 2016, when demonetization of Rs. 500 and Rs. 1000 notes took place in India without much intimation and preparation. Most businesses suffered, daily exchanges became tough. But, now a sign of relief appears, like little drops of rain shower on a hot sunny day.

The relief comes in the form of the news that RBI has not been printing Rs. 2000 notes since past 5 months, for there are sufficient denominations in the country to maintain the liquidity. Instead, as they have noticed the need for notes of lower denominations, they have stepped up the printing of other denominations, including new Rs 200 notes.

Wait, Rs. 200 notes! That would really impact the forceful purchase of bulk materials. Yet, not in much as about 90% notes that are now being printed are of Rs. 500. Which means, someday or the other we shall be caught in the bulk purchase trap.

RBI decreases the repo rate by 35 basis points
RBI decreases the repo rate by 35 basis points, eases loan taking

Today, however, RBI has announced to cut the repo rate (the rate at which other banks borrow money from the RBI) by 25 basis points to 6%. The move has been reasoned as a reward for softened inflation (which reflects only on reports), yet it is a great step as it is the first time that it has become so low since 2010.

Repo Rate drops to 6% for the first time since 2010
Repo Rate drops to 6% for the first time since 2010

While this implies that borrowing money from all banks for the citizens in India would become relaxed, it also means that there would be inflation in the future, which would create the needs for these loans. Although there is rejoice about the fall in loan prices ahead of the festive season, with Eid-ul-Zuha, Ganesh Chaturthi, and Dussehra lined up over the next two months, there wouldn’t be more subsequent cuts in the repo rate.

The rate cuts will trigger the growth of demonetization affected sectors such as real estate and automobiles, while also benefiting others. All we can hope is to fight the inflation with Rs 200 notes that are coming to the Indian economy next month. May the liquidity in the economy be maintained.

200 notes (1)
Graphic by: Abhishek Srivastav

 

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