Rate cuts can't reverse India's investment drought
The inflation rate surprisingly accelerated to 7.6 percent in August. That made it irresponsible for Governor D Subbarao to follow up on April's half-percentage-point cut in the policy rate. Besides, the current-account deficit, which ballooned to a record 4.2 percent of GDP in the last financial year, is unlikely to narrow to a more sustainable level soon.
The rupee has fallen 14 percent against the U.S. dollar in the past year, but that is not closing the trade gap. Exports are sputtering and the nation's energy import bill is likely to remain high. If the U.S. Federal Reserve's new quantitative easing pushes up the price of oil, the bill will rise, perhaps in the face of lacklustre global growth.
In any case, while a rate cut might make capital less expensive, there are other restraints on the publicly traded companies controlled by local entrepreneurs, the source of between 50 and 70 percent of capital expenditure between financial years 2005 and 2008, according to Jefferies' analyst Nilesh Jasani. Most notably, too many of them are already neck deep in debt.
The central bank isn't ignoring the government's efforts. Governor Subbarao said monetary policy will be used to "reinforce" pro-growth government policies and acknowledged
Be the first to comment.