RBI rate cuts alone can’t revive growth

The New Indian Express

 18 Apr 2012 12:29:40 AM IST

Sending out a strong signal to a floundering Indian economy that has been in strategic drift for well over a year now, the Reserve Bank of India that had increased rates 13 times between March 2010 and October 2011 to fight inflation, cut repo and reverse rates by 50 basis points each. 

The correction is aimed at spurring growth to 9 per cent levels, seen before the global financial crisis that began in 2008, RBI governor D Subbarao said on Tuesday while unveiling the annual credit policy. 

“The reduction in the repo rate is based on an assessment of growth having slowed below its post-crisis trend rate, which, in turn, is contributing to the moderation in core inflation,” the governor said.

A pass-through by the banks, especially to millions of borrowers in the home and even automobile sectors, may be easier said than done as the banks will again hold on to the current rates a bit further, clearly with an eye on the margins.

 Even then, the quantum of solace for the public may not be totally in sync with what the RBI has set out to do as the banks would come out with their own methods of balancing deposits and loans. The immediate fallout of RBI’s decision to cut short-term lending rate to 8 per cent would be a marked disinterest by banks in accepting deposits.

Clearly, it is high time the government shrugged off its inertia and dusted off a few policy initiatives — FDI in retail, aviation and pension funds among those keenly watched by offshore investors

 It also needs to address widening gaps on the current account and trade fronts, leading to a highly skewed fiscal deficit position. With industrial production down to 4.1 per cent in February, the government is fast running out of options.


 Because, inflation though subdued for the nonce, is waiting to cut loose again once the government decides to agree to the shrill cry of oil companies for a steep price hike, both for petrol and diesel. Then, the situation that warranted the present rate cut would have reversed itself, in double quick time.