The third cut in the short-term lending rate by the Reserve Bank of India (RBI) in four months comes bundled with widespread anticipation that these would eventually percolate down to the end borrower. The quarter percentage point cut in the repo rate, at which the central bank lends money to commercial banks, at 7.25% is now nearly two percentage points lower than its peak of 9%. Hopes have sprung anew that banks will finally begin unwinding the high equated monthly instalments or EMIs that home loan borrowers have been forced to cough up over the last three years. The RBI uses monetary tools to stymie demand and cool prices. In the contest between sliding growth and rising inflation the RBI's priorities have firmly been on the side of taming runaway prices. It kept interest rates high for most part of the last two years, withstanding mounting pressure from business leaders and the government who have been arguing that high borrowing costs were hurting consumption demand and firms' capacity expansion plans, both strong edifices of the India growth story.
Households putting off spending are sure signals of an economy-wide squeeze. The fact that automobile sales slumped 7% in April supports the view that the erosion of people's purchasing power remains unabated. Persistently high inflation and interest rates can dent discretionary spending and corporate investment, and RBI governor D Subbarao appears acutely aware of this theoretical truism. Three-year low inflation rates, rebound in exports, expectations of a normal monsoon and falling commodity prices have rekindled optimism that the Indian economy may well be on course for a swift turnaround after hitting a decade-low of 5% in the last fiscal. The sharp decline in WPI inflation to 5.96% in March, the lowest since December 2009 when it stood at 4.95%, may have allo-wed that little bit more elbow room to the central bank to cut rates. But India's overall consumer price inflation - a more realistic measure because it captures shop-end prices of most commonly consumed goods and services - is still ruling uncomfortably in double digits.
Subbarao, perhaps presenting his last full-year monetary policy before he demits office in September, have spared no punches in making it clear that the real reasons for the crippling slowdown are brewing somewhere else. The RBI reckons that India's GDP - or the aggregate value of all goods and services produced in the country - will likely grow by 5.7% in 2013-14, by no means a V-shaped boom that would help the economy regain its status as an engine for global growth. Inflation, too, will not fall by much and the central bank expects the price trend to hover around 5.5% over the next 12 months. The central bank believes that quality of governance, quicker project implementation and rapid removal of structural bottlenecks will determine the speed of India's recovery - all of which need the immediate attention of the political establishment.