Rate Cut will Boost Growth?
Some economists while comparing Indian interest rate with the rates in USA or Japan often argue that the cost of borrowing in India is high and that it must be brought down. They argue that it will boost investments and growth. MPC has also endorsed it while recommending rate cut.
Contrary to general belief about disagreement among economists the first post election review by the MPC unanimously decided to reduce the policy REPO rate by 25 basis where as looking at slowdown in the growth and liquidity crises market was expecting more, the sensex after trading higher in the morning session declined more than 300 points in the afternoon.
The reason for expecting a higher rate cut was the statement made by Mr. Shakti kant Das in a forun at Washington where he categorically remarked that there was no need to think that the policy rate cut will be the same every time by 25 basis point it can be either more.
Rate cut will not boost the growth till the market centimatesare negative.
Remember the Keynesian concept of Liquidity Trap. So government will have to continue to do the measures to do increased spendings on rulal economy so the industry centiments turns positive and private investers do come forward to invest their capital. Investment will come
a. if their is enough demand and
b. the invester see profitabilitity gain
So the wait and watch policy before the first budget of Ms. Nirmala Sitharaman, the first full fledged woman Finance Minister of India is timely.
Trickle down of benefits is not seen:
What is not working at ground level is the passing the benefits of rate cut to the borrowers, In the market the interest rates are stickey and liquidity is tighter. So RBI should ensure that the benefits of the rate cut percolates to the ground so common man may get cheaper loan and participate in the growth. thetargted growth rate for FY 20 has also been reduced to 7% whereas it was 7.2% earlier. Further in the wake of the Q 4 Growth rate coming down to below 6 % the target for FY 20 has been fixed by the MPC at 6.4 to 6.7 % in the first half anf7.2% to 7.5% in the second half of the next financial year.
Inflation is stable stimulating sentiments for bigger cut:
The expectations of the market in the light of stable CPI and the fixing of target inflation at 4 % plus minus 2 % were that the MPC announces a bigger cut this was the first time when the rate cut was announced third time in a row after 2013.
The CPI targets have been revised to 2.9% to 3%. If the government succeeds in this than it is the time to take up the Reform Agenda on the top in this budget which has been kept on halt may be again taken up
If this is not taken up immediately in this budget people may loose faith and the coming election in State Assemblies may not be as rewarding for the present government as they have been now at the centre again in Modi Government 2.0
So without waiting further the government should go ahead on its Economic Reform agenda and boost the slowing economy with a further dose of rate cut in next sixth months by at least 50 basis points.
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