A 25 basis point cut in the repo rate by the Monetary Policy Committee will not quite fan the smoldering embers of India’s growth into a blaze. But the decision to change the policy stance from neutral to accommodative will help, when the new government’s policy interventions produce a new growth impulse.
Only 42% of the 50 basis point reduction in policy rates since February has been passed on as lower rates on new lending. Sticky transmission, thanks to the huge pileup of bad loans on banks’ books, and the lack of energy, as yet, in autonomous demand for investment, consumption or exports, have rendered monetary policy a relatively weak instrument of imparting momentum to economic growth, which had slumped to 5.8% in the January-March quarter, despite a pick-up in election-oriented expenditure, particularly in March, by political parties. The slowing world economy, trade tensions and President Trump’s war talk over Iran do not help.
The government has to bear the brunt of infusing new vigor in the economy. Transport minister Gadkari’s huge road building plans would help, as could a coherent approach to indigenizing defense production.
Inflation is likely to stay muted. The real risk is of low-interest rates encouraging an asset price build-up in the capital markets, even as the real economy continues to dawdle. Sebi and the RBI will have to stay vigilant on this front.