The recently announced reforms, if implemented properly, will improve productivity and growth in the long term. But what about the short term?

The key to kick-starting growth lies in increasing investment in the economy. One way to do that is through lower interest rates. But the fuel price hike will raise inflation; wholesale price inflation accelerated in August and monetary easing by US and European central banks have led to a surge in commodity prices. Non-food manufacturing inflation has also been moving up.

True, the Reserve Bank of India in its guidance given during the first-quarter review of monetary policy did say: “As the multiple constraints to growth are addressed, the Reserve Bank will stand ready to act appropriately." But if it sticks to its stand that inflation is enemy No. 1, it’s difficult to see how it can reduce policy rates immediately, although the government has finally decided to prune its deficit a bit and has also taken decisive policy action long called for by the central bank.

So the lower interest rate kicker to investments may not happen immediately, although growth will certainly get a boost if it does. Indeed, some banks have already cut lending rates, and the promise of lower rates in the future stays. But the questions about land acquisition and environment clearances persist, as do numerous other challenges that the economy faces.

There’s no doubt, though, that the reform announcements have been a mood-changer. This will be reflected in the markets, which have already been buoyed by the resurgence of risk appetite after promises of perpetual quantitative easing by the European Central Bank and the US Federal Reserve. To the push factor given by the quantitative easing is now added the pull factor of reforms. India exchange-trade funds rallied sharply in the US on Friday after the reform announcements, which came after market hours in India.

Animal spirits will be back. Businessmen will become more confident. And if the equity markets go up and stay up, it will allow businesses to raise funds, repair their balance sheets and expand. This is what happened during the last boom. Moreover, the inflows boost the currency, which in turn would lead to lower imported inflation.

The key question then is: will the rally be sustainable? The rallies caused by previous rounds of quantitative easing in the US or Europe all fizzled out as investors realized they did not solve the underlying problems. The last boom in emerging markets was the result of not only easy money in the West, but also strong global growth. That confidence is missing today.

This time, though, there’s the promise of unlimited quantitative easing. Every setback for the US or European economies will presumably be met with another gush of liquidity. That should continue to provide fuel for rallies in risk assets. The catch is that these are completely uncharted waters and nobody knows what lurks in their depths.