Finally, the government has come out with a coordinated monetary and fiscal policy response to a slowing Indian economy.
The Reserve Bank of India has slashed the cash reserve ratio from 5.5% to 5% and has also reduced the repo rate to 5.5% from 6.5%. At the same time, the government has announced a second stimulus package.
Will it work? It just might. It is well known that pessimism, more than anything else, sucked the life out of markets. The problem, so far, was that government responses were only of the half-a-limb kind: Either too much emphasis was paid on monetary policy or stand-alone, badly designed, fiscal packages were put out.
Friday’s announcement is different. Fiscal stimuli that have the potential to raise demand need a monetary base to stand on. The twin steps have the potential to restore lending confidence.
Stimulus 2.0 will spur firms to produce and once banks know that demand exists “out there” and companies can do business and give their money back, it just might bring back animal spirits.