Breakingviews: RBI rate cuts won't revive India's stalled growth

SINGAPORE Tue Jan 29, 2013 3:49pm IST

1 of 2. The heads of India's private and state-owned banks gather under an RBI logo in a conference room at the Reserve Bank of India (RBI) headquarters as they wait for Governor Duvvuri Subbarao to arrive for a quarterly interest rate review briefing in Mumbai January 29, 2013.

Credit: Reuters/Vivek Prakash

Related Topics

SINGAPORE (Reuters Breakingviews) - The RBI's latest interest rate cut won't revive growth. The central bank's quarter-percentage point reduction in the policy rate, to 7.75 percent, is just as futile as the last one almost a year ago. GDP will pick up when New Delhi curbs its own profligacy and improves the investment climate. The February budget may be the current government's last chance to do both.

If companies aren't investing, it isn't because monetary policy is too tight. With 10.6 percent consumer-price inflation, the base rate for borrowing in 10-year bonds was already negative in real terms before this last rate adjustment. Rather, the government's quest to fund itself is crowding out the private sector. Banks are forced to buy up government bonds, meaning two-thirds of what households save in a year is reinvested in public debt.

Bottlenecks choking growth are also in need of attention. A debilitating coal shortage is hurting electricity production. Meanwhile, road builders are wriggling out of contracts with the highway authority on the pretext that the environmental clearances promised to them are taking too long to materialize. Such factors help explain why GDP growth for the financial year is expected to slow to a ten-year low of 5.5 percent.

Deep interest-rate cuts are currently impossible because of inflation. Rural wages are rising at an annual 18 percent pace. If more money isn't matched with greater investment and output, the result would merely be a further boost to imports, widening India's 5.4 percent current account deficit. For now foreign investors are helping to finance that through their purchases of Indian stocks and bonds, but it would be unwise to rely on that, especially if India's broader economic improvements don't take hold.

Growth thus depends on what New Delhi unveils in February. Finance minister Palaniappan Chidambaram has promised fiscal consolidation and other reforms. If he avoids the temptation to indulge instead in vote-buying populist measures that increase the government's spending commitments, there may be hope not just of another rate cut, but of a recovery too.

CONTEXT NEWS

- The Reserve Bank of India cut its policy interest rate of 8 percent by a quarter-percentage point on January 29, the first reduction since April 2012. To ease liquidity conditions, the monetary authority also pared the ratio of deposits banks are mandated to keep with the central bank as cash by a quarter-percentage point to 4 percent.

- In its quarterly review of economic and monetary developments, the central bank said that an improvement in investment climate is a "prerequisite for economic recovery" and that the "quality of fiscal adjustment remains a concern." Risks remain from "suppressed inflation, pressure on food prices and high inflation expectations getting entrenched into the wage price spiral," the monetary authority added.

- While demand conditions are "tepid," a current account deficit of more than 4 percent of GDP for a second straight year makes it necessary for the authorities to remain prudent while stimulating aggregate demand, the Reserve Bank said.

(Read main story, RBI cuts repo rate, CRR, click here)

(The author is a Reuters Breakingviews columnist. The opinions expressed are his own)

(Editing by John Foley, Katrina Hamlin, and Robyn Mak)

FILED UNDER:
Comments (0)
This discussion is now closed. We welcome comments on our articles for a limited period after their publication.

  • Most Popular
  • Most Shared

COAL BLOCK ALLOCATIONS

REUTERS SHOWCASE

Financial Inclusion

Financial Inclusion

Modi to launch plan for every Indian household to have bank account .  Full Article 

E-Commerce

E-Commerce

Ratan Tata invests in online retailer Snapdeal.  Full Article 

Sugar Talk

Sugar Talk

Sugar export rebound at risk from rising domestic prices.  Full Article 

GDP Preview

GDP Preview

Economy likely grew faster in June quarter: Reuters poll.  Full Article 

New Ordeal

New Ordeal

After disasters, stricken Malaysia Airlines staff brace for job cuts.  Full Article 

Deal Talk

Deal Talk

Kleiner to invest in messaging startup Snapchat at near-$10 bln valuation - report.  Full Article 

Safety Net

Safety Net

SEBI revamps trading safety-net rules.  Full Article 

Expert Zone

Expert Zone

Column - Why inflation is so persistent.  Full Article 

Fraud Investigation

Fraud Investigation

IMF's Lagarde put under investigation in French fraud case.  Full Article 

Reuters India Mobile

Reuters India Mobile

Get the latest news on the go. Visit Reuters India on your mobile device.  Full Coverage