Rate cuts by RBI not magic bullet to propel investments: Raghuram Rajan

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Former RBI Governor Raghuram Rajan has said repo rate cuts by the Reserve Bank in recent times are not a "magic bullet" that will necessarily propel investments, as several other factors play a part in boosting the economy.

Rajan further said interest rates, at this point, are not overly high and the impact of rate cuts announced by the RBI will take time to play out.

"And as you correctly point out, (high) interest rates were an argument (earlier), but I do not think that can any longer be an argument.

"I do not think that necessarily this (rate cuts by RBI) will be a magic bullet to propel investments," Rajan told PTI Videos.

On June 6, RBI Governor Sanjay Malhotra-headed six-member monetary policy committee reduced the benchmark short-term lending rate by 50 basis points, taking the total reduction to 100 bps in quick succession, besides a change in the policy stance to neutral from accommodative and liquidity infusion measures.

Rajan was asked whether repo rate cuts announced by the RBI in recent times will finally nudge corporates to increase their investment plans.

The eminent economist said: "Some of the other factors, including creating more of a transparent sort of playing field and creating more competition in a number of sectors, will urge industry to be less complacent and more focused on investing to preserve their advantage and their lead".

"So, I do not think it is just interest rates. I think it is a combination of factors...But I hope that more corporate investment is forthcoming."  He said that Indian industries have not seemed to be investing after the massive investment expansion before the global financial crisis.

"They (Indian industries) have become much more circumspect, and they can not keep saying this is the condition of the domestic economy -- earlier, they were saying the lower middle class is not spending, rural areas are not spending.

"Now it is flipped over. It is the upper middle class which is not spending," Rajan, currently a professor of finance at Chicago Booth, said. Recent data from the Ministry of Statistics indicated that the share of private sector investment in India has dropped to 11-year lows. "And as you correctly point out, interest rates were an argument, but I do not think that can any longer be an argument," he said.

In FY24, the private sector's share in gross fixed capital formation (GFCF) -- a key measure of investment in physical assets -- dropped to 32.4 per cent. Asked if there is any room for the RBI for further rate cuts as CPI inflation has fallen to 2.1 per cent in June, Rajan said he does not like to comment on the central bank's policy.

"Let me just say that we are in a very comfortable situation as far as inflation goes, and to some extent, the tariffs on imports in industrial countries, which may sort of propagate from the US to other countries, tend to be disinflationary for countries that export," he said.

Rajan said he would not pay as much attention to headline inflation, even though the headline inflation is what the RBI is targeting. "But I would also take a look at core inflation at such times, just to satisfy myself that the disinflationary impulse is across the board.

"And if you look at core inflation, it is somewhat higher than the headline number," he noted. CPI headline inflation was 2.10 per cent in June 2025, and it is the lowest year-on-year inflation after January 2019. Crude oil prices are currently under control.

Food inflation in June 2025 was -1.06 per cent. Assuming a normal monsoon, the RBI projected inflation at 3.7 per cent for FY26. While pointing out that core inflation is at a comfortable level, Rajan said, "Interest rates are not at this point overly high after the rate cuts that RBI has made, and we will have to wait for some more time to see how things play out".

Responding to a question on surge in net outward foreign direct investment (FDI), he said FDI is complicated. "It is not just people putting sort of money on the ground in greenfield projects."  "Sometimes you know what they take out in terms of dividends, etc, counts negatively on FDI I do worry that. "Given the sort of push in a number of firms for an alternative to China plus one strategy, we should be getting much more of that kind of FDI," he said.

And of course, Rajan said India should be getting FDI, which seeks to find a place with good logistics but reasonable workers, much like some of the southern states are attracting that kind of FDI.