Instead of banking on rate-cuts, govt needs to move on policy, fisc to revive investment

Shift in RBI's policy stance will only have signalling effects until government resolves corporates' project-related issues

The Reserve Bank of India made all the right noises on policy rates in the coming year, but what is apparent is that Governor Raghuram Rajan will take follow-up action only when the government does its part to manage the fiscal deficit and take key measures to revive investments. 

The RBI has made it amply clear that interest rates are not the only things restraining the investment cycle. Infrastructure bottlenecks and supply-side issues on raw materials continue to plague corporates, the central bank said. 

Thanks to the cooling of commodity prices, the battle against inflation may be easier to win than creating an environment conducive for growth. Governor Raghuram Rajan has also made it clear that the stronger the information, the sooner will be the accommodation in policy rates. 

Highlighting the other factors that have impacted investment cycle, the RBI statement points out that "A durable revival of investment demand continues to be held back by infrastructural constraints and lack of assured supply of key inputs, in particular coal, power, land and minerals. The success of ongoing government actions in these areas will be key to reviving growth and offsetting downside risks emanating from agriculture – in view of weaker-than-expected rabi sowing – and exports – given the sluggishness in external demand."

Dhananjay Sinha, head of institutional equities at Emkay Global, said the RBI has not given a clear signal adding that central bank will be a follower rather than a leader in any rate action move.  

“Also, the governor believes transmission of lower rates within the banking system has been slow, so what the RBI is saying that reduction of rates will largely be a signalling move. RBI would like transmission be better," he pointed out, saying that it seems like a near certainty that the governor will not cut rates the 2016 Budget. 

The government has its work cut out on the fiscal front as well as on the investment front. The RBI will take cues from the government and follow with interest rate cuts once issues that are hindering growth are resolved. 

Rates are only going to be a signal, as a result, and not a trigger for investments to pick up. Making this clear, Rajan hinted that he would like to see better transmission of rates than visible so far. "The weak transmission by banks of the recent fall in money market rates into lending rates suggests monetary policy shifts will primarily have signalling effects for a while. Nevertheless, these signalling  effects are likely to be large because the  Reserve Bank has repeatedly indicated that once the monetary policy stance shifts, subsequent policy actions will be consistent with the changed stance,” the central bank said in its statement.