Going into a shallow interest rate downcycle, RBI has accomplished most of it with dispatch. Last week's larger-than-anticipated repo rate cut by 50 bps to 5.5% from the earlier 6%, marking the third reduction since February, will serve two purposes. One, it gives the economy an early start to revive borrowing and investment. Two, it signals that the battle with inflation is done for now and RBI could tease out some more cuts. MPC has essentially created the setting for growth to revive through its cumulative one percentage point interest rate cut since the beginning of the year. Such resolute action should, as governor Sanjay Malhotra hopes, calm nerves in an uncertain economic environment of trade wars and geopolitical tension. The stock market ended the week on a strong note, pushing key indices-Sensex and Nifty-higher by 1%.
The problem with using monetary policy to stoke demand is a bit like pushing on a string. Unless it is backed by supporting fiscal measures, liquidity on its own achieves little. Here, RBI has a reasonable degree of comfort. Tax giveaways announced in the budget at the beginning of the interest rate downcycle are expected to prop up consumption in the second half of the financial year. GoI is also scheduled to hike salaries of its employees, which typically has a considerable impact on the economy. With inflation now looking set to undershoot its target for the year, there is additional support for consumption.
The certainty RBI is projecting derives from the global economic uncertainty that is keeping a lid on energy prices. Donald Trump's economic agenda is yet to be revealed in its entirety, which will allow markets and policymakers to frame their responses better. Indian policymakers can push ahead on the basis of the strength of domestic consumption. They are correct in directing their energies at keeping this aspect of the economy stable. It helps that monetary and fiscal policy are on the same page.
The problem with using monetary policy to stoke demand is a bit like pushing on a string. Unless it is backed by supporting fiscal measures, liquidity on its own achieves little. Here, RBI has a reasonable degree of comfort. Tax giveaways announced in the budget at the beginning of the interest rate downcycle are expected to prop up consumption in the second half of the financial year. GoI is also scheduled to hike salaries of its employees, which typically has a considerable impact on the economy. With inflation now looking set to undershoot its target for the year, there is additional support for consumption.
The certainty RBI is projecting derives from the global economic uncertainty that is keeping a lid on energy prices. Donald Trump's economic agenda is yet to be revealed in its entirety, which will allow markets and policymakers to frame their responses better. Indian policymakers can push ahead on the basis of the strength of domestic consumption. They are correct in directing their energies at keeping this aspect of the economy stable. It helps that monetary and fiscal policy are on the same page.
