Rate cut cheer

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Rate cut cheer

Saturday, 09 February 2019 | Pioneer

Rate cut cheer

The RBI unexpectedly cut rates but will it provide the impetus the Indian consumer economy needs?

The Reserve Bank of India (RBI) cut its benchmark lending rate by 25 basis points to 6.25 per cent. And while many expected the dispensation in the RBI under new Governor Shaktikanta Das to be more favourable to the Government, most analysts expected a rate cut in the next review meeting of the monetary policy committee in April. The move seems to have been taken since inflation is in check and there was an urgent need for the Government to boost consumer sentiment ahead of the 2019 Lok Sabha election. With the monetary policy stance changing to neutral, does the new regime at the Central bank believe that the difficulties faced by the consumer economy last year will subside in a lower interest rate regime?

That is hard to see but historically, data for consumer durables, automobiles and two-wheelers have always seen moderation if not a decline in pre-general election years with demand almost always showing a major rebound this time around. The financial results of several consumer facing firms over the past few quarters have been reflective of this, with profits sharply falling for automakers, consumer goods and airline companies. Partially, this is explained by the huge injection of funds into the consumer economy, an open secret of election season in India. But it also shows that Indians spend more after an election because the policy-making process tends to rejuvenate in a post-election scenario when the political atmosphere becomes less vitiated. However, with some vocal distrust of economic data being voiced by economists and statisticians, it is fair to wonder if everything is as hunky-dory as it is being made out to be.

There is no doubt that bank lending, particularly by Public Sector Banks, has dropped significantly and in the case of some banks, has stopped altogether. Thousands of crores are tied up in tax refunds for both direct and indirect taxes, putting stress on the working capital requirements of companies. At the same time, promises of dole payments by political parties of every hue are putting more pressure on the revenue collection of tax collectors, leading to what some have described as outright tax terrorism. This will not be solved by a small decrease of interest rates because if banks do not start lending, things will not change. The real estate sector, which has been in doldrums for almost a decade now, is a proof of that. The minor decline of interest rates will do little to boost this sector.

The next Government that will take office before the end of May will have a hard task at hand trying to revitalise the economy. While there should be cause for optimism, thanks to the Indian consumer, with jobs growth being poor, much more needs to be done to get the wheels of the economy growing. The next Government and the RBI should be careful to ensure that there is no sudden flight of capital and of talented people from India. The interest rate cut is welcome and investors do seem slightly happy but this is just a small step in ensuring that the results of a seven per cent economic growth cannot just be boosted but also trickled down to those who need the growth the most.

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