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If there was ever a signal that the Reserve Bank of India (RBI) was worried about economic growth, it is in these monetary policy documents. While interest rates have been lowered by a surprising 50 basis points (bps), the central bank has also cut its output growth projections to 7.4% this fiscal year, 20bps lower than the August forecast. This essentially means that the rate cut is meant to support rather than boost growth.

Yes, there are instances in the monetary policy report where the central bank has pointed to demand conditions firming up in the September quarter, citing instances such as consumer durable production increase and a pick-up in consumer lending by banks. But it also says upfront very clearly “Looking ahead, the macroeconomic environment appears subdued."

The monetary policy report cites a huge laundry list of why the macroeconomic outlook is depressed: decline in rural consumption, shrinking pipeline of new projects, stalled projects, persistent capacity under-utilization, build-up of finished goods inventories, the high stress on bank balance sheets, muted export prospects, poor rains waylaying an agricultural recovery and structural weakness in various core sectors such as electricity and oil and gas. The central bank’s industrial outlook survey points out that lack of external and, especially, domestic demand is the biggest constraint.

Moreover, external demand is likely to be muted as well with global growth projections being cut. World trade volume growth is falling behind world gross domestic product growth. At the same time, this lack of demand has been accompanied by pressures in the capital markets with ballooning volatility and capital outflows.

In that context, what are the measures RBI has taken?

One, it has used all the space available—from falling inflation and the US Fed’s rate hike delay—to spring a 50bps rate cut. Much of this comfort is derived from projections that inflation would not only be less than its 6% January 2016 target, but moderate to around 4.8% by March 2017. Moreover, as Gaurav Kapur, economist at Royal Bank of Scotland Plc.’s India unit points out, the central bank’s own risk scenario analysis shows that this March 2017 target can be met even if there are some shocks along the way. Read in conjunction with other measures such as reducing risk weight for housing, the central bank has given a fillip to demand.

Secondly, RBI seems to be hoping that if growth steadies it might staunch the flow of capital from equity markets. It has also increased the limits of foreign portfolio investments in debt markets in the hope that it might entice inflows and steady the markets.

That the central bank has frontloaded this rate seems to indicate no further cuts in the immediate future, perhaps till the Union Budget. At the same time, RBI’s projection of 4.8% inflation by March 2017 means that, if things go according to plan on the inflation front, policy could still remain accommodative.

The moot question now is whether this will work.

Economists say it would definitely provide some impetus to rate sensitive activity but that could to a large degree remain focused on consumption. It is too early to say whether it will push investment spending.

The monetary policy report itself has the last word on this: “Monetary policy can play a role, but only as facilitator, not as primary actor."

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