Trending down: A cut in RBI policy rate is welcome but more must be done to boost the economy–Times of India–03.08.2017

Reserve Bank of India’s monetary policy committee (MPC) yesterday lowered its policy interest rate by a quarter of a percentage point, the first change in 10 months. The current rate, 6%, has now been brought down to the level that existed over six years ago. The change signals two things. One, MPC is now more sanguine about the trajectory of inflation. Two, the reduction in interest rate has come amidst signs that industrial performance remains lacklustre. Given this context, MPC’s decision is welcome but it is unlikely to make a meaningful difference to the economy.

Interest rates have been trending down for a while. In the backdrop of slowing growth of bank credit, deposit rates have been constantly lowered. Recently, State Bank of India lowered even savings rates for most of its deposit holders. On the other side, interest rates for borrowers have not declined proportionately on account of the bad loans plaguing banks. But there has been more activity from non-banking financial intermediaries and India’s top companies have been able to benefit from the current environment. It is the smaller companies, the ones most dependent on banks, which have missed out.

The benign environment for borrowers has not translated into a revival of investment demand. MPC’s statement pointed out that the number of new investment announcements fell to a 12-year low in April-June quarter. Part of the problem can be traced to the collapse in global trade following the financial crisis, but there are levers the government can use to improve the situation. The immediate need is to carry through with the resolution process of bad loans following the promulgation of an ordinance in May. This must be supplemented with measures to ease doing business, which would substantially improve the investment climate.

DISCLAIMER : Views expressed above are the author’s own.

via Trending down: A cut in RBI policy rate is welcome but more must be done to boost the economy

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