BackOpinion | Over to the government
The central bank has so far brought down its repo rate down to 5.15%; adjusted for inflation, this is just half a percentage point
PremiumThe Reserve Bank of India (RBI) has paused its rate-easing cycle after an uninterrupted series of cuts all through this year as the economy has kept slowing down. The central bank has so far brought down its repo rate down to 5.15%; adjusted for inflation, this is just half a percentage point. If food inflation remains obdurate or feeds into general inflationary expectations, as the central bank has pointed out, further cuts could take the real interest rate at which it lends money to banks into negative territory, exposing the limits of this form of monetary easing as a means to revive sluggish investment and sagging demand.
RBI’s monetary policy committee has, alongside every reduction in this cycle, been lowering its projection of economic growth for fiscal year 2019-20, which in itself is an admission of the inefficacy of monetary easing under the current economic circumstances. Its latest forecast is 5% for the year, down from 6.1%. It’s grim indeed. In any case, rate signals from Mint Road are not filtering through to banks, which have lowered their lending rates only by a fraction of the repo rate cuts. Banks are constrained by sticky interest rates on deposits and small savings, amid lacklustre credit growth. Government borrowing barrels on, however, but buyers of treasury bonds are offering their money at interest rates that are still out of step with this year’s cumulative cuts in the repo rate.
If the message is lost on the borrower as well as the lender, the central bank’s rate setting committee may want to consider redrafting it. A targeted approach to monetary expansion may yield better results if the regular transmission is not as efficient as the RBI would have it. The bigger message, however, is that it is for the government to pull the economy out of its slump.
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