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The Reserve Bank of India (RBI) cut the benchmark repo rates in its monetary policy meeting yesterday 29 September by 0.5%. The cut in the policy rates is an acknowledgment that the inflation is coming under control. However, will rate cuts be enough to push the economy forward?
As per an article written in the Business Standard, a rate cut was extremely crucial to bring down the unemployment rate in the country. The article stated that India is staring at a job crisis wherein PhDs were competing for peon's job. Further, the literacy rate in India has improved leading to an increase in the job demand. At the same time, the job pipeline has dried up, leading to higher unemployment rate. A rate cut will give a boost to private investment and could help in bringing down the unemployment rate.
In the current scenario, private investments are sluggish. The export demand has crashed. There is a lot of excess capacity in the world remaining unused. These capacities can swell further if China devalues its currency further to give an economic boost to its sluggish economy. This will make imports from China much cheaper as compared to the India's production. Certain countries such as Brazil and Russia are already in recession. The Eurozone and Japan are struggling. Probably the rate cut by the RBI has come at a time when India really needed it to stimulate the economy.
However, the RBI's action will be meaningless if the banks don't pass on the reduction in the interest rates to their customers. Before the current cut of 0.5%, the RBI had already cut the repo rate by 0.75% this year. Some banks have still not passed on the previous rate cuts. Generally the effect of a rate cut is seen after three-four quarters. So nothing will happen at a lightning speed. The effect will be felt in the coming quarters gradually.
Further, rate cut will not solely be enough to stimulate the economy. Government reforms are equally important. Currently, the pace with which the reforms are moving forward is not encouraging. The government needs to fix the country's fragmented tax system, push land acquisition and labour reforms. As the saying goes 'You cannot clap with one hand', governments push for reforms are equally important to stimulate the economy apart from the RBI's help. We advise investors not to take investing decisions based on events like the RBI's monetary policy.
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