Monetary Easing is Fine, But Not Enough

Lower rates and fiscal stimulus alone will not spur growth. Structural constraints, economic and financial, need to be addressed

- Himadri Bhattacharya

With a 25-basis point cut in the policy repo rate by the RBI’s Monetary Policy Committee in its fourth bi-monthly meeting this fiscal, the cumulative easing in 2019 so far stands at 135 basis points. Such deep and continuous rate cuts have not been witnessed in recent decades. Also, with the new policy rate now at 5.15 per cent, a section of the market believes that a sub-5 per cent rate is clearly on the horizon, given the not-so-upbeat prospects of the Indian economy outlined in the MPC’s statement. The accommodative stance of the policy continues.

The MPC took note of the further widening of the negative output gap since its last bi-monthly meeting in August. There is a view among analysts that the MPC should have reduced the rate by 40 basis points to reflect the urgency needed to aid growth recovery, especially because inflation has been behaving so well. Perhaps this was also the reason why one MPC member voted in support of a larger cut. The equity market responded negatively to the lowering of the growth projection for 2019-20 by MPC from 6.9 per cent to 6.1 per cent. However, the benchmark 10-year G-Sec yield rose marginally after the policy.

Macro economic scene