Interest Rate Cut Obsession Is Hurting Indian Economy

Indian Economy is not growing. What has to be done? Interest Rate Cut.

GDP growth is not 7%. What has to be done? Interest Rate Cut.

Automobile sales is declining. What has to be done? Interest Rate Cut.

The population of monkeys on theĀ IRMA campus is decreasing. What has to be done? Interest Rate Cut.

I know I made up the last point above. Nowadays, any news on the Indian economy in any media will always have a mention that interest rate cut has to happen to stimulate the Indian economy. Any industry association in any of its meeting will raise a bogey for interest rate cut to improve the customer sentiment. Any Government personnel will pass a snide remark that RBI is not doing enough on the interest rate cut to revitalize the animal spirits of the Indian market.

This point of interest rate reduction gets mentioned so much by anyone and everyone that it seems this is the only weapon to get the Indian Economy off the ground. But why blame them? RBI under Shaktikanta Das is so much benevolent that there is no need to consider any other option.

Why have MPC?

At the time of Urjit Patel, there was some sanctity about the MPC meeting. He was called by Finance ministry before one of the meetings presumably to influence him, he did not oblige. Shaktikanta Das needs no such urging. He has been appointed with one-point agenda, and like any other pliant IAS, he obeys his master’s command.

It is given that RBI is going to keep reducing the interest rate. There is nothing unpredictable about it. To break the monotony, Shaktikanta Das came up with 0.35% reduction in the latest round.

Well, if this is the only thing to decide – how much per cent to reduce, why to have a charade of MPC at all?

Make Interest Rate Zero

Now that, it has been agreed between the RBI and the monkeys on IRMA campus that there is no other way but to reduce the interest rate for the betterment of Indian Economy, why not make it zero?

I am serious about my suggestion. RBI has reduced 1.1% interest rate till now. The impact on Indian Economy has been zilch. So, why to go for a thousand cuts? Let us perform the full and final operation on the patient right away.

Once the Indian Economy gets going, the animal spirits are awakened and all that, RBI can then start raising the rates. At whatever rate of interest, the animal again sleeps, the RBI should stop.

Interest rate cut and growth

Earlier, there might have been some correlation between the reduction in the interest rate and economic growth. I am not an economist. Now, for sure, there is a correlation. Just that it is a negative one.

You do not believe me. Look at any of the economic growth parameters since Shaktikanta Das started doing what he was appointed for.

Since there is no unpredictability in RBI’s actions anymore, everybody feels that s/he has to wait for just two months more for another rate cut. Why spend now? Let’s wait for just two months. And, the economic growth is still awaiting the proverbial two months to prosper again.

Summing Up

I understand that an interest rate cut is an option for reviving economic growth. Just that, there is so much obsession with this option, it seems this is the only option.

With no other alternatives being considered and interest rate cut having lost its potency, Indian Economy has only one way to go – Down.

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