Steps that RBI can take to Boost Growth

The Reserve Bank of India is facing a strange problem of diminishing returns on its rate cuts. In under a year, Shaktikanta Das led Monetary Policy Committee (MPC) has ‘cut’ policy rates by 135 basis points and as a result flooded the banking system with surplus liquidity of nearly ₹2 trillion and from the looks of it central bank may not be done yet.

But despite this massive monetary stimulus the reality on the ground has not yet changed, growth is continuing to go down and has fallen to a six-year low of 4.55% in the September quarter of 2019. The only growth that is happening in the Public sector, the manufacturing sector is now showing signs of recession, contracting by 1% during the September period. The lack of credit flow to firms only adds to the problem. Far from being awakened the animal spirits of private investment are sleeping soundly. Seeing the writing on the walls repeatedly GDP growth forecast has been lowered three times by the central bank.

The current rate cuts, that are the fastest and the steepest since the ones that hit after the global financial crisis of 2018, have failed to make the desired effect on the economy. Though rate cuts are important, it is not the only weapon in RBI’s arsenal to battle the current slowdown. 

The biggest challenge for Governor Shaktikanta Das right now is to restart the credit flow to firms and thus restore the lost trust in the financial markets. What this means is to make banks and other financial institutions lend to firms, including the battered NBFC sector. Until credit flow restarts with a thrust, growth won’t have a good chance to recover.  

The central bank needs to encourage, by whatever means at its disposal, banks to lower their lending rates and manage market yields. 

A major part of the transmission of rate cuts problem will be solved as more and more loans get linked to RBI’s repo rate or some other market-related benchmarks.

Topics: GS-III: Economic Growth Development