Surjit Bhalla, the noted economist who was appointed as a member of Prime Minister Narendra Modi’s newly-formed Economic Advisory Council, has a single-point suggestion to revive the economic growth and bring it back on its feet. However, that suggestion is not for the Prime Minister or the Finance Minister; it is for the Reserve Bank of India, ie, cut policy rates by 100 basis points. Surjit Bhalla argues that the only answer to a slow economy is low-interest rates
It was being anticipated that the government on Monday would announce something along the lines of a booster dose to aid the ailing economy. However, the government instead formed the EAC, and announced Saubhagya Yojana to provide electricity to all households. With the government not putting forth any economic policy in place to fix the economy, the analysts say the onus has now shifted to the Reserve Bank of India to do its part when it sits for the bi-monthly policy review next week.
Surjit Bhalla has advocated cutting rates on the back of the slow economic growth — low GDP, high inflation, equity markets at a month’s low, rupee going down, et al. He recently demonstrated how each 100 bps increase in the key policy rates in one-year eventually causes decrease in economic growth by 40 bps. “In most countries (strike that, and replace with “all countries except a unique country called India”), the above question has the same answer — look at interest rates, stupid. No matter what country, central banks and government officials have the same answer and the same policy: To increase demand (up the GDP growth rate), decrease interest rates; to decrease demand, increase interest rates,” Surjit Bhalla wrote in a strongly-worded column in the Financial Express last week.
However, the RBI is highly unlikely to cut the rates for now since it has little room from the point of view of inflation, which recently started inching up, DBS Research said in a note this morning. “The headline inflation might settle within 3.8%-4.5% range for rest of FY18, around RBI’s 4% target,” DBS said in the note.
Further, the economic stimulus could eventually end up widening the fiscal deficit, leaving RBI with even lesser room to cut rates, DBS Research said in the note. “Speculation that fiscal consolidation might be delayed or that FY18 deficit target of 3.2% of GDP might be breached, will only leave the RBI more cautious than before,” it said.
RBI, in its last policy review in August, reduced the repo rate by 0.25% to 6%, citing reduction in inflation risks. The rate cut was the first in 10 months and brought policy rates to a near 7-year low. In the same month, the retail inflation rose to a five-month high of 3.36% due to higher prices of vegetables and fruit but still remain below RBI’s 4% target.