Has RBI unloaded its arsenal too soon for the economy?

Economic agents need confidence more than liquidity to get investment and demand going

- SRINATH SRIDHARAN

The Reserve Bank of India (RBI) has acted with intent; a cumulative 100-basis-point rate cut since February, to be followed by a bold 100-basis-point reduction in the cash reserve ratio (CRR) that will infuse ₹2.5 trillion into the banking system later this year. This was accompanied by a swift recalibration of the policy stance from 'accommodative' to 'neutral,' suggesting that India's central bank sees this as the outer limit of easing for now. In effect, RBI has declared that the liquidity bridge has been built. It is now up to others to cross it.

These moves, though significant, were largely in line with market (and media) expectations. They reflect a clear direction towards pushing for growth in the enduring trade-off that all central banks must grapple with. The rate cuts, once transmitted effectively through the banking system, should lower the cost of borrowing for both firms and households. The CRR cut will critically expand the pool of lendable funds. All this should lighten the fiscal borrowing load by easing pressure on interest rates. But it is in the gap between intent and outcome that the policy challenge now lies. You can lead a horse to water—and deepen the trough—but can't do much if the horse does not drink it.