The new monetary policy declared by the RBI doesn’t consider the interest rate reduction signal requested by the investors and the loan seekers. Those visioning a positive turnaround were also expecting the RBI to initiate interest rate cuts. A softened interest rate environment is necessary to revive growth in the economy. Definitely, a repo cut would have signaled beginning of the badly needed interest rate cuts.

By postponing the repo cut, the RBI has delayed the inevitable reversal of monetary cycle.

The existing high interest rate phase was started in early 2010. It is the result of continuous repo rate increase during thirteen revisions since then. The Repo rate, which is the most important interest rate signal, now stands at 8.5%, pushing the average base rate to 10%.  Throughout the period, the high interest rate has been depressing consumption and postponing fund raising by the corporate for investment purposes. Picking up investment and consumption is essential to revive growth. For this, interest rate should come down. Besides, there are reports that high interest rate also resulted in defaults and NPAs in the banking system; weakening financial stability.

The working of high interest rate is that it reduces consumption, investment and thus production and income. Through this income depressant channel, high interest rate reduces inflation in the economy. Hence, there comes a conflict between economic growth and low inflation (price stability). For the economy to return to the growth path, the RBI should redeem the economy from the high interest rate regime. This is the priority for now, and liquidity adjustment is a day to day matter only.

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