The Reserve Bank of India (RBI) should deploy more measures to improve liquidity before going for another rate cut, Axis Bank chief economist Neelkanth Mishra said on Tuesday. The RBI can reduce the incremental cash reserve ratio, hold more open market operation purchases and use long-term repo operation, he said.
“Cost of liquidity at this time is exorbitantly high. On some measures, this was comparable to what some financial markets see at a time of distress. But, the economy continues to chug along, telling the underlying strength. If liquidity pressures are eased and regulators pull back from imposing overly cautious regulations, the economic growth will be around 7%,” Mishra said at an event.
On further rate cut by the RBI, he said the regulator should first focus on liquidity, as reducing rates will not help unless liquidity conditions in the banking system ease. “If the objective is to ease financial conditions and support growth, which is what the MPC has stated… my prescription would be to focus on liquidity first because at this stage cutting rates is not helping.”
Despite a slowdown in the country’s GDP, India will stay on a path to grow at 7%. Although US tariffs will pose some headwinds to the growth, leading to a slowdown in world’s GDP, the impact on India will be limited as the relevance of global growth in journey of India’s growth has significantly come down over the past 10 years, Mishra said.
Attaining 7% is the “trend growth” for India, he said, adding that amid volatilities at the global level, a large part of it will come domestically – “7% is our trend growth, with 1% coming from labour growth, 2% from total factor productivity and 4% from capital formation.”