How will reducing the repo rate by 40 basis point from 4.4% by RBI, help revive the Indian economy? :
The question is —- How?
It assumes that this action will have some role in the likely revival.
Cutting the repo rates is not something new. It has been done so many times in the past, every time with same platitudes attached to it.
We are living in strange times where those in charge of policy have distanced themselves from plain common sense. They attach so much importance to their petty actions and decisions. Every decision is meant to bring a significant change in our life.
It surely does. Mostly it makes things worse.
Did demonetization achieve anything other than just change in the look of currency notes?
Did linking of Aadhar Card with your bank account provide you with world class banking?
Same thing with RBI rate cuts. They happen quite regularly. It is like a doctor prescribing a larger dose of medicine for an ailing patient in the hope that it will be a cure. But the patient is not responding.
Nothing is different this time.
Have a look at the repo rates for the past.
In last one year, repo rate has come down from 5.75% to 4.00%.
Bringing it down from 5.75 % to 4.4 % did not boost the economy. Why additional 0.4% cut will do that?
On every occasion in the past, these rate cuts were hailed as a great break through which are going to put the economy back on track. Every time the anchors on business channels were ecstatic as if a miracle cure has been found.
A horse can not run faster than its inherent ability.
There is a popular horse racing saying.
“Putting more weight may slow down a horse, but reducing the weight will not make it run faster than its inherent ability.”
Indian economy is that horse with reduced ability due to multiple reasons. Interest rate was the weight. That is being reduced but it still keeps moving on its own slow pace. There is no acceleration, no sign of a quick spurt to victory.
You can not make it run faster than its poor ability.
Only way it can be done is by cheating the clock.
We have done in the past by changing the way GDP was calculated. But economy and industrial production are realities. They do not get revived just by changing the numbers.
What after this? :
Who told us that governments care for economy?
They are here for getting voted back to power. Good economy was never good for politics of winning elections.
We shall see more rate cuts and if at all there is an improvement in economy, that will not be due to these repo rates. That would be due to enhanced demand when people have more money to spend.
Till that time, let us keep on having the same discussion every time RBI reduces the rates.
A futile pursuit.
Thanks for reading.
Image : Global -Rates.com
Posted on Quora today.