Repo Rate Cut Will Help to Increase Demand

RBI has cut the repo rate by 40 basis points to bring it to 4%. It is a good and positive monetary response from the central bank to boost the demand in the economy. Coupled with a moratorium, the rate cut will result in more money in the hands of consumers to spend. Although, for the banking sector, it is not that good news and will have to face the brunt of this decision. The increasing moratorium period will not only have a negative impact on banks’ earnings in the short run but also on the NPAs as well in the long run. Apart from this the government has to get ready to recapitalize the banks in the next two years. At present the government needs to bring the lost confidence back to the people so that they start spending rather than saving for the unseen future.

This monetary response will be able to address to demand side problems to some extent but not all. Economic relief package announced by the government is more focused on the supply side than the demand side and at present there are more problems on the demand side. So the government needs to do more to increase the demand in the economy as monetary responses alone would not be enough to have a 'V' shape recovery. At present India needs a ‘V’ shape recovery at any cost else millions of Indian citizens would be pushed in the vicious trap of poverty. However during this lockdown, no economic relief package can increase demand. We have to wait till the economy is brought to normalcy to assess the demand situation in the economy.

Rajeev Upadhyay

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