Cut in interest rates alone would not revive economy; consumer confidence will

A big cut interest rates by the RBI, this time, is going to be transmitted by the banks in somewhat equal measures to the borrowers, just because government wants it so.

On earlier occasions , while the RBI had reduced the policy rates , not even one-third was passed  on to the borrowers who continued to pay same amount of EMIs for their housing and car loans . So, for the borrowers, every time there was cut announced by the RBI , it was just an academic exercise alive for a day or so.

In the mean while, the analysts and commentators would blast Governor Raghuram Rajan for being too conservative and obsessed with inflation without bothering for growth.

But, now that the  majority owners of the banks, that is – government has “ nudged “ them, the banks would fall in line. The worst is that the banks had got their Repo reduced, dropped  the deposit rates but did not cut the lending rates, increasing their own margins. Despite that, their NPAs went on piling up….Blame whomsoever, you may like…but this is not the way banks should be run.

This time as well, while the deposit rates have already been cut considerably in the last one year,  there is a clamour for reducing the interest also on small saving instruments like NSCs, PPFs.  So, the small savers’ loss becomes gain for the big time industry, borrowers, banks ……great economic this is! 

The industry keeps on making demand for an interest rate cut; as if  that is the only trouble with the lack of investment and demand. If that was so, Europe, Japan and the US with almost zero interest rates , would have been in boom; but they are battling slowdown, bordering on recession.

Yes, the stock market got a boost from a 50 bps cut in interest rates; today's rally is more in line with global cues - most of the Asian markets are in the green from overnight gains Dow Jones and Nasdaq.    

Investment is also a function of consumer demand, which is not always created by cheap interest rates. Not all consumers borrow to buy goods or properties. Bulk of their consumption is met by their own earnings, and savings which in turn depend on the kind of employment, quality of employment and prospects of growth.

In a way, it is a chicken and egg story; but then as has been proven time and again, you cannot live on borrowed money for too long and too much; there must be earnings and savings…..Let us avoid one-sided debate on interest rates, only from borrowers’  point of view.