The Reserve Bank of India (RBI) has done its part by announcing the much-awaited rate cut by 25 basis points. It is now for the government to move in and follow it up with necessary policy reforms to spur economic growth. Though the central bank’s decision to lower its benchmark repurchase rate to 6% from 6.25% fell below the government’s expectations, it would certainly give the leeway for appropriate policy interventions to boost investments. Though marginal, the repo rate cut in the third bi-monthly monetary policy review is expected to pave the way for the banks to reduce interest rates, making home and vehicle loans cheaper. While announcing the policy, RBI Governor Urjit Patel rightly pointed out that there was ample scope for banks to cut their lending rate further, given the liquidity situation in the market. There is no doubt that cheaper credit will boost revival of private investments, growth and jobs. However, past experience shows that the banks have not yet fully passed the benefits of rate cuts to the consumers, largely due to huge bad loans. The government expected a more aggressive rate cut because a sharp moderation in retail inflation over the past few months had raised hopes for further monetary policy easing. Apart from a record fall in retail inflation, factors like subdued global oil prices, normal monsoon, smooth GST rollout and sluggish growth in manufacturing sector favoured a steeper rate cut.
The industry bodies have been rooting for a more aggressive rate cut to give a fillip to growth, especially at a time of low inflation and tepid private investment. It remains to be seen whether a moderate rate cut could stimulate investments. However, given the limitations of the monetary policy, the RBI has done its bit and the onus is now on the government to take measures to boost manufacturing and improve the overall business climate. With the underlying impulses for growth in industry and services weakening, the Centre and the States need to take enabling steps through policy measures to give a thrust for the revival of private investment. The slashing of repo rate is expected to perk up market sentiments and enable a gradual recovery in credit cycle and help reinforce confidence among global investors. Banks could leverage this opportunity to broad-base their credit consumer base further. On its part, the government must initiate steps to resolve the issue of bad loans and supplement them with measures to ease doing business to substantially improve the investment climate. It is time to reform the archaic labour laws. They are the main obstacles to growth in the manufacturing, sector, which has stagnated at around 16% of the GDP for more than three decades.