Lowering Of Interest Is Not The Only Solution

Lower interest rates alone not enough to drive growth: RBI--Business Standard

RBI has been traversing growth-inflation knife edge recently

The Reserve Bank of India (RBI) believes that in a scenario when non-monetary factors are impeding a robust revival in growth, lower real or nominal interest rates are not enough to stimulate growth. 

 

“Price stability and exchange rate stability are necessary preconditions to sustainable high growth. Furthermore, when non-monetary factors are impeding a robust revival in growth, lower real or nominal interest rates may not be just enough to stimulate growth,” said RBI's executive director Deepak Mohanty in his speech in Pune on Friday.

 

RBI has been traversing a growth-inflation knife edge in recent years. According to Mohanty the sluggish growth conditions in the last two years and the dampened investment activities warranted a shift in the stance of monetary policy. The extent of monetary policy easing, however, has been circumscribed by the persisting risks to inflation and the external balance position. 

 

A notable feature of monetary policy transmission in India is the asymmetry one observes during different phases of a monetary policy cycle, opines Mohanty. 

 

Usually, during a phase of rising policy rate, banks may be quick in raising their lending rates while in a phase of falling policy rate, banks may be slow in reducing their lending rates as cost of deposits does not adjust commensurately given the fixed nature of deposit contracts. According to Mohanty this pattern reflects that loans, being mostly at variable rates, can be re-priced at a quicker pace than the fixed rate bank deposits.