It is a different issue that borrowers have to borrow more for investment. If they do not borrow more but take advantage of the lower cost, it helps their profit & loss (P & L), but may not add anything to investment, which appears to be the case today. The problem is more on the demand side. Hence, lowering rates may not really lead to the push required for growth. Consumption has not quite picked up pace, which has also meant that the capacity utilisation rates have not reached the level required for that extra push. Infra investment remains stagnant from the private sector; and the NPA issue combined with the NBFC (non-bank finance companies) challenges has to be sorted out before there is fresh interest shown.
But such a rate cut can have wider ramifications for savings, as presently the problem is also on this front where households are saving less. Also, as there is a significant part of the population that lives on interest income, there could be negative effects on such spending that hence comes back to hurt consumption. This is one reason as to why banks have not been lowering their deposit rates with alacrity.
The accommodative stance indicates that there will be further easing of inflation, which also means that the monsoon will not be perverse nor are there any known fears of fiscal led demand-pull inflation forces. Therefore, inflation will remain benign under 4 per cent and we can expect another 25-50 bps cut in the repo rate
during the year.
Interestingly, this also means that the RBI
does not see the economy picking up as it has lowered its forecast to 7 per cent from 7.2 per cent. The 0.2 per cent number is not significant but a lower revision means that we may not be seeing too many green shoots this year. It will be another tough year for the economy and the employment-output equation may not change much.
Madan Sabnavis is chief economist at CARE Ratings. Views are personal
Disclaimer: Views expressed are personal. They do not reflect the view/s of Business Standard.