Monetary policy easing remains the mantra among global central banks trying to battle the economic slowdown. After the Reserve Bank of India’s (RBI’s) latest 25 basis points repo rate cut, investors are focusing on the US Federal Reserve and Bank of Japan’s interest rate decisions, due later this month. A basis point is 0.01%.

With a series of disappointing macroeconomic data releases, especially from the US, the clamour for further easing has grown louder. According to economists, while global central banks may have some more space for reducing policy rates, transmission is the key hurdle.

According to Edward Glossop, emerging markets (EM) economist at London-based Capital Economics Ltd, EM central banks have more room to trim interest rates than their developed market (DM) counterparts.

“If faced with a steep downturn, most emerging market (EM) central banks would be able to cut interest rates substantially in order to cushion their economies. Of course, the transmission from monetary policy to the real economy in EMs is typically weaker than in DMs, with academic research suggesting that EMs need to cut rates by roughly twice as much as DMs to get a similar impulse," Glossop said in a report on 4 October.

Graphic: Santosh Sharma/Mint
Graphic: Santosh Sharma/Mint


An analysis by research house Julius Baer showed that the third quarter of 2019 saw the largest number of interest rate cuts by central banks over a three-month period since the financial crisis of 2008-09.

“However, whilst you might be able to lead a horse to water you can not necessarily make it drink. The same holds true for central banks and companies. Central banks can open the monetary floodgates, but they cannot make companies borrow and invest. Thus, central banks are ill-equipped to counter the uncertainty felt by many in the (corporate) world caused by escalating geopolitical/trade tensions," it said in a report on 2 October.

In case of India, economists say that RBI’s cumulative rate cut of 135 basis points delivered in this calendar year so far puts it ahead of Asian and most global peers in the current easing cycle. Since the problem of delayed transmission prevails in India as well, some economists are of the view that RBI should now stay put.

“We think they have done enough easing and, given a considerable policy transmission lag, which the RBI policymakers acknowledge too, they should now pause and allow the rate cuts so far to work their way through the real economy before taking any further action. Otherwise, they run the risk of aggressive stimulus, via both monetary and fiscal channels, eventually transmitting into higher inflation," Prakash Sakpal, Asia economist at ING Bank NV, said in report on 4 October.

Some analysts say this is one of the reasons RBI cut rates only by 25 basis points this month, despite a sharp cut in its growth expectations for the economy.

Unless transmission improves, global central banks could put brakes on their aggressive easing and save the remaining ammunition for later.

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