Walking the Tightrope
With a view to strike a balance between economic growth and inflation, the Reserve Bank of India (RBI) has lowered the repo rate by 25 basis point, to 6.25 per cent
- With a view to strike a balance between economic growth and
inflation, the Reserve Bank of India (RBI) has lowered the repo rate by 25
basis point, to 6.25 per cent. The cut, the first in nearly five years, is
aimed at prioritising the country’s growth which is projected to be a four-year
low at 6.7 per cent, falling well below the 8.2 per cent growth rate that India
had registered in the previous fiscal. This has left economists worrying, as a
low growth rate in the ongoing fiscal will impact the growth in the next fiscal
too. It will be a severe blow to India’s dream of becoming a developed nation
by 2047, which requires the country to register 8 to 10 per cent growth rate
for the remaining years. In view of this, the RBI has made the move following
an impressive cut in the income tax rate though the inflation remains above its
4 per cent comfort level.
- But India faces a major hurdle in its quest for a higher
growth rate amid threat of a trade war looming large, which will surely have an
impact. The problem could be further complicated with the strengthening of the
dollar and weakening of the rupee. US president Donald Trump has already
announced a 25 per cent steel and aluminium tariff and also threatened to match
the tariff rates levied by other countries, which will be applicable to all
countries. Besides the war-torn Eastern Europe, Israel-Palestine conflict,
there is tension worldwide which is not conducive for trade and commerce. This
is why a section of economists feel that India may have chosen a wrong time to
expedite growth as the overall global situation is not favourable for such
moves, while volatile energy prices and US monetary policy will continue to
pose a risk to the global economy.
- So, India has its task cut out as it will have to maintain a
delicate balance between growth and inflation. The country cannot afford to
allow the inflation rate to rise further and the growth rate to fall. While the
RBI has hinted at raising the repo rate if the present rate fails to meet the
expected growth, it will walk a tightrope as the current situation demands a
flexible regulatory stance. So, while attempting to revive the economic growth
without jeopardising financial stability, the RBI should focus on recovering
non-performing assets (NPA) through banks and at the same time ensure that
private parties with cent per cent equity in the insurance firms to invest the
entire profit in India, as proposed in this year’s budget.
