Mumbai: In a bid to spur anaemic global growth, central banks are injecting more money into the system. The latest to loosen monetary policy and dole out a stimulus is the European Central Bank (ECB). On Thursday, ECB reduced deposit interest rates and approved a fresh stimulus package to boost euro zone growth. But as they say, everything comes at a cost.

More often than not, such announcements give a short-term bounce to equity markets. However, economists say that it is the long-term after-effects that should not be ignored.

Graphic by Naveen Kumar Saini/Mint
Graphic by Naveen Kumar Saini/Mint

“Ultra-accommodative policies risk fuelling mispricing in risky assets and widening the gulf between the real economy and asset markets, in midst of abundant liquidity," said Radhika Rao, senior vice president and economist at DBS Bank Ltd.

In case of India too, the trend of faster growth in consumption than income has made its economic growth unsustainable, say economists. A raft of economic data, including the June quarter gross domestic product and the latest Index of Industrial Production, have given ample evidence of a slowdown.

Naturally, the clamour for further accommodation in monetary policy has got louder.

The Reserve Bank of India (RBI) is expected to cut interest rates yet again in October. So far in 2019, it has trimmed the repo rate by 100 basis points. A basis point is 0.01%. In spite of its tight fiscal position, there are expectations that the government would lend a hand to RBI through a spending boost.

But, putting more money into people’s pockets or making them take loans to encourage consumption, may only be a band-aid solution. When loans become cheaper, households tend to save less and, therefore, investments could reduce.

“…the authorities will need to make thorough considerations before taking any steps to encourage consumption (and/or debt) or discourage savings, because while these measures could prop up economic growth in the short run, long-term consequences could be multi-fold and highly adverse. We believe that further monetary easing could be counterproductive," RBI said in a 9 September report.

Some economists say instead of going full throttle on easing, fixing the root cause of the slump in global growth will be better.

“Deflationary pressures raise the spectre of Japanification—the paradigm of furiously pushing the pedals of monetary policy without the growth and inflation cycle going anywhere. There is serious doubt of whether the dosage is potent enough anymore in an environment of already depressed yields," said Aurodeep Nandi, India economist and vice president at Nomura Holdings Inc.

Unless the US and China make peace on their tussle over trade, global growth may benefit little from monetary benevolence. For India though, resolution of trade tensions is not enough.

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