RBI Governor’s Decisive Move: Good For Our Economy

While several quarters including the Finance Ministry & consumers have been exerting pressure on the Reserve Bank of India with expectation of a rate cut, Governor Raghuram Rajan has held firm on Interest rates for the moments in his efforts to permanently tame inflation! I fully endorse the RBI governor’s decision. In my view, the reasons for holding off the decision to cut interest rates is straightforward & simple.

Interest rates & monetary policy are only supposed to be ‘tools of last resort’ in any economic revival strategy. The more important and first steps towards reforming the economy will entail decisive governance and policy action that spurs foreign and domestic equity investor sentiment and restart equity investment cycle - which in turn can create the significant Direct investment flows that are required in large doses across the spectrum of the economy. These broader reformative policy actions & economic architecture must first be firmly in place & precede any effort by the RBI to cut interest rates. On the contrary simply lowering interest rates without stabilizing the economic fundamentals will cause adverse effects on both the Rupees value and inflation for the consumer.

While the current inflation momentum and fiscal developments are certainly encouraging, the economy should get back on track solely on the back of a new economic architecture and reforms; and not rely on monetary policy. Helped by lowering oil prices, the Consumer Price Inflation has slowed to 5.52%. The world over, we have seen that moderate inflation is a pre-requisite for sustainable growth. A start has been made, our economy is slowly getting back on track after 10 years of policy paralysis, there has been a 6.3% growth in the core sector and auto sales reported a 10% growth in November. The Government must now stay the course and ensure that we meet our fiscal targets and the Budget encourages capital investment.

On the back of these positive developments, a cut in interest rates, even if it was by 25 basis points, would have had some cosmetic impact on loans and EMIs, but very little long term economic value. As citizens, we must acknowledge the strategic value of such decisions. While this decision by the RBI means that till the Budget session, the consumer will not see any reduction in rates, it will allow time for Narendra Modi govt & Finance Minister to roll-out his economic reforms & architecture. This will also allow us time to gauge the reforms of the PMO India Narendra Modi Govt. The vision for India’s economy must place strategic long term economic growth as a primary goal. Rate cuts should accelerate economic growth, not lead it.

This is why I support the RBI governor’s decisive, structural reform driven move to hold interest rates till next year.