Missing a ‘rate’ trick

The Government must take at least part of the blame for the Reserve Bank of India’s (RBI) decision not to reduce either its lending (‘repo’) rate, or the cash reserve ratio stipulations for banks. When the RBI had, at the time of presenting its annual monetary policy in April, slashed the repo rate from 8.5 per cent to 8 per cent, the implicit understanding was that the Government would complement this with credible fiscal consolidation measures. The latter, by releasing resources for productive public investments, would create an environment that makes further monetary loosening both possible as well as more effective. 

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