Why RBI's decision is not an anti- depressant...

For some reason, the RBI's rate  cut (by 50 basis points)  triggers anxiety rather than reassurance. Japan's decades long experience proves that low interest rates do not drive investment; it is the confidence in an economy that pulls it through.

1. The rate cut is in an economy which has seen withdrawals by FIIs. Where there has been a flight to quality.
2. FIIs pulled out over Rs.  17,000 crore from Indian equities during August 2015. This was the highest in a month since 2008. 
3. One cannot by logic reduce interest rates when capital goes out.  Unless the Central bank believes that this Indian growth story is taking a severe knock.
4. Savings ratio has been falling to about 30 %. The incidence of the rate slash is on the saver. Savings are now at a discount.  That means that  the long term project funding is likely to take a drubbing.  The investments India  needs are gargantuan. 
5. Mammoth infrastructure building alone can create jobs through multiplier effects. Monetary policy will not create jobs directly. 
6. If you keep interest rates low, saving attrition rather than saving accretion takes place.
7. The immediate beneficiaries of a rate cut are likely to be consumer durable industry and the real estate industry. Consumer durables are expenditure items which do not lead to asset accumulation. To that extent, we see the liabilities of the household sector moving up to finance conspicuous consumption. Personal finances will see a hit in the medium term.
8. The real estate prices which by the Governor's prior statement, stand inflated might see a marginal fall.  On a prior occasion, the Governor had advised builders to first bring down prices and clear the stock ; cheaper home loans will now keep real estate rates high. The home builders have been reluctant to pass on lower costing benefits to prospective home owners. RBI has rewarded the same group through  cheap loans. This is indicative of a  mis-allocation between demand and supply in the housing sector. Where prices should have been lower, monetary policy has sweetened the borrower demand. 
9. The industry lobby which has been lobbying has gained at the expense of the savers who have no lobbies.  
10. Or is it that the RBI sees a severe economic winter coming and is preparing for it in advance?

The views expressed here are academic in nature and without any risk or responsibility. The blog recommends no investment.