By lowering the policy rate by another 25 basis points to 5.1% and lowering the growth forecast for the current fiscal to 6.1%, the RBI sends two signals. One, the RBI stands committed to the process of reinvigorating the economy with lower interest rates and greater liquidity, should that be needed, thanks to its accommodative stance. At the same time, by declining to do a repeat of the 35 basis point cut in the repo rate that it had carried out two months ago, even while accepting that growth will slow to 6.1%, the RBI wants to make it clear that liquidity availability is not the binding constraint on growth.

The need is to generate demand, by pouring concrete. Investment must pick up in the short run, to revive confidence that growth is on the horizon and induce people to consume more. Instead of waiting for private investment to pick up following the offer of a 15% corporate tax rate, the government should step up investment directly, increasing the fiscal deficit if necessary. The need is for immediate action.


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