India is fast running out of cash to boost the economy-- putting the onus on RBI

  • CLSA believes that in the next 18 months, RBI might cut 75 basis points or 0.75% in interest rates.
  • It already cut its base lending rate by 1.35% this year.
  • CLSA expects base rate to come down to 4.4% by early FY21.
The Reserve Bank of India (RBI) will have to take up an extra responsibility—of pushing the slowing growth in the country. In the last few months, central government too had played its part by reducing corporate taxes and other moves. But the sluggish economy might need more impetus, and the government may not have the cash for it.

Research firm CLSA believes thatRBI might end up cutting 75 basis points or 0.75% in interest rates in the next 18 months. This will help banks lend more at lower interest rates, which will help push the economy.

The banking regulator has consistently cut the rate at which it lends to banks at every monetary policy since February this year. In all, it reduced its repo rate by 135 basis points to 5.15%. But as per CLSA, it will have to come down to 4.4% by early FY21.

“Absent fiscal options, the onus for stimulus remains with monetary policy. The government’s fiscal position has already been stretched by the corporate tax cut, which will widen the fiscal deficit by around 0.7% of GDP,” the CLSA report said.

To provide a fiscal boost, the government had reduced corporate tax rate to 21.1% from 34.2%. While this came as good news to many companies, the exchequer has to pay for it. It will also translate to tightened budgets of state governments, which will spend less as tax revenue falls. Government is one of the largest spenders across schemes and measures, and is a key driver of the economy.

Added to that, private entities are also not keen on expanding as capital goods imports have almost remained steady. Apart from the existing banking crisis which is leaving them weary of lending, corporates too are wary of growth in times when consumption is shrinking.

In fact, large FMCG companies are resorting to price cuts to reverse the slowing trend. “Consumption prospects are clouded by declining rural real wage growth. On RBI’s estimate of sticky 3.8% nominal wage growth for rural labourers over the last 12 months, the rising inflation measure for rural labourers means their real wage growth has turned negative,” the CLSA report said.



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