The RBI has cut interest rates to the lowest levels in nine years but can that jumpstart the Indian economy?
The 35 odd-basis point cut in inter-bank interest rates by the Reserve Bank of India (RBI) was seen as an indication that a quarter per cent cut was too little and a half per cent cut may be a bit too much. Whatever it was, it is seemingly unlikely that this will be the booster shot the Indian economy needs because banks are still hesitant to lend money to customers and even if they do, few are passing on the benefits of lower rates to customers. Almost all our banks, particularly public sector ones, are still suffering from the profligacy with which they forwarded loans a decade ago. So when the Chairman of India’s largest bank, the State Bank of India, says that he looks to the heavens to pray when speaking about top insolvent accounts, it becomes evident that even the reforms on the insolvency code haven’t really helped matters. And now the dramatic collapse in non-banking financial companies has only made the situation worse. But is it just about a switch, as some are commenting, that could turn 18 months of gloom overnight? Is India just in a vicious cycle of negativity that is making consumers and companies hold on to the purse strings tight? Could an injection of positivity be the change that India needs, one that will make banks lend again and consumers buy again? But where will that injection of positivity come from is the question. Quite clearly, it is not going to be from rate cuts, unless thanks to the reduction of interest rates, it becomes apparent that the best way to deploy one’s financial assets is to spend because the money will not earn much interest in the bank. May be the positivity that India needs will be a good monsoon, which will lead to a positive festive season come September with Onam kicking off the upbeat sentiment. Indeed, the Onam floods of 2018 in Kerala were the ignition source for the dramatic slowdown in sales for the Indian automotive industry.
The events surrounding Kashmir notwithstanding, the government really needs to ramp up its efforts on the economy. Because not only are behemoths dramatically scaling back new hires, the class of 2019 is finding it impossible to get jobs as companies have begun layoffs. This, and not the reactions in Kashmir, should be keeping Narendra Modi up at night. The cycle of negativity has to be broken and a rate slash frankly does not cut the mustard.
Writer & Courtesy: The Pioneer