Fears of a slowdown have boiled over from the Main Street to Mint Street. The concerns of a slowdown have slowly but surely travelled from social media chatter, anecdotal evidence and scattered data points, to the 18th floor of the Reserve Bank of India (RBI).
No longer is it expressed in veiled hints and quaint phraseology of central banks, but in clear, certain terms: “the implementation of GST..may further delay revival of investment activity”, “consumer confidence of households polled in RBI survey has weakened..”, and “the projection of real growth for 2017-18 has been revised down to 6.7% from the August projection of 7.3%”.
So, what held back the RBI monetary policy committee, headed by Governor Urjit Patel, from cutting interest rates? The purists would argue that a quarter or even half a point rate cut would not tempt a corporate house to borrow Rs 3000 crore to put up a new factory.
Certainly, it won’t. But it’s a puerile argument to delink growth and rates. The irrefutable truth is that all businesses which are displaying signs of growth — such as two-wheelers, automobiles, regular mortgages and affordable housing – are all sensitive to interest rates.
But the monetary authority is obsessed with aggregate numbers.
Even though RBI talks about inflation as a lurking concern — and therefore indicates it as the reason to pause — the successive policy exercise brings to the fore the mindset of the central bank and the righteous persons who shape the policy.
They somehow seem to nurture the belief that low rates do not quite work in India: borrowers would walk into banks when they have to borrow irrespective of interest rates while the returns to an army of savers, still overwhelmingly dependent of interest from bank fixed deposits, need to be protected. Along with this unstated ethos, are the priorities of the newly-constituted policy committee which is keen to establish its credibility, even if means sacrificing growth for a few quarters.
In the past few years whenever RBI has cut rates, its hands were forced by circumstances – it was never out of choice but due to an absence of it. Rarely has the inherently conservative organisation indicated that it has the space to cut rates.
Chances are this space would shrink in the next few months. Unless there is a dramatic dip in sentiment, the data on inflation is likely to make it difficult for RBI to prune interest rates before January or the Union Budget.
How would the RBI stance and action play out? Many betting on rate cuts in the coming days perhaps think that the committee is preparing the grounds for a cut. In most policy statements, RBI typically argues a lack of space (for rate cut) by pointing out the rising inflation trajectory but later finds the space to accommodate a rate cut.
But such hidebound postures often dampen the efficacy of a rate cut, perhaps achieving less than what it could have if timed rightly.
Few would disagree with RBI when it says the GST mess needs to be fixed, banks have to be capitalised and loan waivers would fatten deficit. These glaring truths can only help RBI temporarily put the ball in the government’s court — a strategy often and more effectively employed by Patel’s predecessor Rajan. But it cannot mask the role RBI should play in managing growth expectations.
On the Wednesday credit policy statement, RBI was reluctant to put its cards on the table: it was neither prepared to cut rates nor change its stance; and while highlighting what could harden inflation, it simultaneously spelt out the factors that could temper it.
As Mint Street keeps the world guessing, the best bet for an optimist is that RBI will be proved wrong, as it has been in earlier this year.