Can further rate cuts revive investor sentiment?

As the economy weakens, pressure is building on the central bank for another rate reduction

Published 5 years ago on Sep 11, 2019 2 minutes Read

Mahendra Jajoo, Head-fixed income, Mirae Asset Global (India)

Further rate cuts will have a positive impact as the economy is in a very bad shape. GDP growth at 5% was at a six-year low in the June 2019 quarter. Exports are facing structural issues, the government is hamstrung by fiscal constraints and demand has temporarily slowed down because of structural reforms such as GST. Hence, there is just one area with immediate room to act — interest rate cut. Currently, India’s real interest rate at 2.2% is among the highest in the world. With CPI at 3.2% currently, it is expected to remain well below 4% threshold for the next 12 months. Hence, the central bank has additional room of 50 basis points for rate reduction. As the cost of capital drops, it will kick-start economic growth, which in turn should have a positive impact on the markets. The biggest beneficiaries from further rate cuts will be sectors such as banks, auto and real estate. Their positive multiplier effect will help revive the economy and overall market sentiment.

Vinit Sambre, Head-equities, DSP Mutual Fund

Merely cutting rates won’t be enough to revive investor sentiment. There is also a need for transmission of low rates. Along with it, private capex has to pick up. It will only happen when confidence building measures are taken. Positive sentiment, clarity and sustainability of policies over the long term are necessary for revival in overall economic activity. Also, the availability of money is a challenge despite low rates. Many are still facing difficulty while availing credit. Sustainability of demand and consumption are essential for economic growth. Tax rates need to be lower so that it increases disposable income and encourages people to spend more. Doing away with long-term capital gains tax should be considered, this will bring back investor confidence. Corporate dividend tax which has created a double taxation structure also needs to be eliminated. If these anomalies are removed, it will help in revival of investor sentiment. A virtuous cycle has to begin for pick up of economic activity.