The recent slowdown in the economy is on account of policy uncertainty and sluggish domestic demand, and a cut in repo rate is unlikely to spur investments, a CRISIL report has said.
“Factors behind the recent slowdown in economic growth and investment in the country have little to do with high interest rates. The primary reason is a sharp fall in the expected return on investments due to policy uncertainty and slowing domestic demand,” rating agency CRISIL said in a report today.
“In such a situation, leaning on monetary policy to revive investments will yield little benefit,” it added. With inflation easing in recent months, there has been a growing clamour for a rate cut to boost the economy.
Retail inflation or CPI eased to 6.46 percent in September, lowest since January 2012, from 7.73 percent in August.
Although the monetary policy tool of cutting the interest rate is conventionally used to energise a flagging economy, it does not hold true under all circumstances, the report said.
“And it carries the risk of reversing the recent gains in inflation, which, in any case, is nothing much to write home about,” it added.
It said investment growth has slowed down sharply even though policy rates have been negative in real terms and real lending rates have averaged less than 3 per cent.
The rating agency said the government should continue to improve the policy environment to raise the expected return on investment.
It also said the new NDA government has taken a number of steps, which will yield results over the next few quarters. “On its part, the RBI should continue its fight to
stabilise consumer price inflation below 6 percent and that would require standing pat on the repo rate,” it said.
Lower inflation will help revive consumption demand and reduce input costs, boosting return on investments, the report added.