 "Y M Deosthalee")
The Reserve Bank of India (RBI) has pleasantly surprised everyone with a bold 50 basis points (bps) reduction in policy repo rate; this has exceeded most expectations. The rate cut is a clear indicator of the fact that the RBI and the government are now on the same page as far as emphasis on sustainable economic growth is concerned. By front-loading the rate cut, the RBI has reposed its confidence in the government's ability to manage fiscal deficit and fallout of weak monsoons on food prices. Weak global commodity prices have also played a part in the RBI's decision. Since the external economic climate is weak, India has to focus on reviving domestic demand to give a fillip to the private sector.
The rate cut is a big positive step in this regard as lower interest rates will revive demand, thereby increasing capacity utilisation of industry. This, in turn, will lead to revival of investment activity in the economy. Sectors that stand to gain directly are construction, real estate, FMCG, auto and consumer durables, where demand is primarily leveraged. As a result of revival in construction and real estate, demand for capital goods, steel and cement will also witness a recovery. Overall, this is a monetary policy that will kick-start the growth momentum in the economy and will go a long way in restoring investor sentiment.
However, for the monetary policy to translate into growth on the ground, the transmission of rate cuts will be critical. While there will be an inevitable lag in transmission of cuts in bank base rates, bond yields should come down much faster. RBI has delivered on a cumulative rate cut of 125 bps during the current calendar year. Now, the ball is clearly in the banks' court to respond with lower lending rates.
Y M Deosthalee
Chairman & managing director,
L&T Finance Holdings
Chairman & managing director,
L&T Finance Holdings
