Beyond The Cut
Times of India's Edit Page team comprises senior journalists with wide-ranging interests who debate and opine on the news and issues of the day.
RBI can't do anything about sluggish incomes
RBI's generous 50bps rate cut cheered markets on Friday, and should ease pressure of EMIs on borrowers soon. But a bigger test lies ahead – will it spur demand, and growth? Although Q4 data for fiscal 2025 was encouraging, its 7.4% growth was mostly powered by govt-led construction. Manufacturing growth remained sluggish, which is a dampener for the central bank's 'growth aspiration' of 7-8%. RBI has already set its growth expectation for the current fiscal at a modest 6.5%. For India to grow in the target range, private consumption – which accounts for close to 60% of GDP – must shift gears, and the three rate cuts this year – altogether 100bps – will make borrowing significantly cheaper. RBI and govt will hope this stimulates demand for housing and automobiles, key industries that employ millions and have significant multiplier effects.
While inflation has finally cooled to a comfortable level, creating room for rate cuts, some experts have diagnosed sluggish demand and slowing price rise as a sign of weak incomes. Post-Covid, the housing and automobile markets became premiumised. Small hatchbacks, once the base of the car market, are now a tiny segment. Likewise, smaller apartments fell off builders' plans. Essentially, mid-income earners got priced out. Cheaper credit could change that, and if private demand booms, so will private capex. That's the hope. But if these rate cuts don't translate into growth, govt will seriously need to look at the problem of income stagnation. RBI has already changed its policy stance from accommodative to neutral, signalling a reluctance to make more cuts this year.
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This piece appeared as an editorial opinion in the print edition of The Times of India.
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