ECONOMIST| ‘Indian industries have become much more circumspect’

PTI New Delhi

Former RBI Governor Raghuram Rajan has said repo rate cuts by the Reserve Bank in recent times are not a "magic bullet" that will necessarily propel investments, as several other factors play a part in boosting the economy. Rajan further said interest rates, at this point, are not overly high and the impact of rate cuts announced by the RBI will take time to play out.

"And as you correctly point out, (high) interest rates were an argument (earlier), but I do not think that can any longer be an argument.  "I do not think that necessarily this (rate cuts by RBI) will be a magic bullet to propel investments," Rajan told PTI Videos. On June 6, RBI Governor Sanjay Malhotra-headed six-member monetary policy committee reduced the benchmark short-term lending rate by 50 basis points, taking the total reduction to 100 bps in quick succession, besides a change in the policy stance to neutral from accommodative and liquidity infusion measures.

Rajan was asked whether repo rate cuts announced by the RBI in recent times will finally nudge corporates to increase their investment plans. The eminent economist said: "Some of the other factors, including creating more of a transparent sort of playing field and creating more competition in a number of sectors, will urge industry to be less complacent and more focused on investing to preserve their advantage and their lead".

"So, I do not think it is just interest rates. I think it is a combination of factors...But I hope that more corporate investment is forthcoming." He said that Indian industries have not seemed to be investing after the massive investment expansion before the global financial crisis. "They (Indian industries) have become much more circumspect, and they can not keep saying this is the condition of the domestic economy -- earlier, they were saying the lower middle class is not spending, rural areas are not spending. 

"Now it is flipped over. It is the upper middle class which is not spending," Rajan, currently a professor of finance at Chicago Booth, said. Recent data from the Ministry of Statistics indicated that the share of private sector investment in India has dropped to 11-year lows. "And as you correctly point out, interest rates were an argument, but I do not think that can any longer be an argument," he said.