INDIA Still Needs More Investment...

Now, that our RBI Guv has floated that we have (possibly) reached the bottom of rate cuts even when the supply-side is weak in INDIA and it needs investment, which has been covered by the foreign investment, greater space for the foreign direct investment to increase employment and foster price-stability when domestic investors are slow to spot opportunity because of higher borrowing cost. However, INDIA’s foreign external debt has shot up like never before in case of lower interest rate abroad after 2008, but it is still questionable, that when investment has been controlled by the RBI by higher rate of interest, how foreign direct investment might help since it would increase demand and inflation too… It shows that INDIA needs investment despite of inflation because it has been plagued by inefficient supply-chains due to low level of investment, it is true that it has a huge population and demand, but it is still suffering from inadequate investment, lower productivity and supply, the RBI chose to control demand, but it is an irony that supply too needs a push by more investment. A policy rate of 6.25% when it is 2% in the trading partners’ economy would make INDIA uncompetitive, especially the commercial banks in the terms of credit-cost and businesses too. Nonetheless, we need to view the RBI’s Monetary Policy from the perspective of the Taylor-Rule, a landmark for the Monetary-Policy, which might further provide a framework to conduct money-supply and interest rate management. According to the rule, the natural rate of interest, that is important for neither an inflationary nor deflationary price spiral, i.e. price-stability, should be targeted for an effective monetary policy and it is almost constant. In the context of the rule we see that real interest rate has been higher than the target 2%, set by the apex bank, in case of the key rates and even more in case of the money or market or nominal rates, we have a real rate of 2.75% if we include the repo rate and that is higher than our target, therefore there is a space for more rate cuts of more than 50 basis points and even more in the market rates, the Indian banks saddled with bad loans need more accommodative action which a rate cut might provide. INDIA has a higher real rate of interest, but is yet to achieve the natural real rate of interest which might be lowered in case of inflation lower than our target. It would improve sentiment or the central bank might conduct open market operation to pass on the previous rate cuts with adequate liquidity. INDIA has lost half of a percentage of the real GDP in the aftermath of demonetization which might be gained by a 25 basis points cut in the policy rates, the Taylor rule says that we have to cut repo rate by 0.50% if the growth rate falls 1%. In other words to achieve 8% the RBI might cut by 50 basis points. INDIA has a higher real interest rate compared to other major economies which is also likely to depress exports.