Axis Bank's chief economist, Neelkanth Mishra, recently emphasized the need for the Reserve Bank of India (RBI) to enhance liquidity in the market before considering another rate cut. Speaking at an event, he suggested that the RBI could implement several strategies, such as reducing the incremental cash reserve ratio and increasing open market operations and long-term repo operations. Mishra pointed out that the current cost of liquidity is extremely high, comparable to distress conditions in financial markets. However, he noted that the economy is still showing resilience, which suggests underlying strength. If liquidity challenges are addressed and regulations are adjusted, he believes India could maintain a robust growth rate of around 7%.
When discussing potential rate cuts, Mishra stressed that the RBI should prioritize improving liquidity first. He argued that simply lowering rates won't be effective unless banking system liquidity is improved. "If the goal is to ease financial conditions and support growth, then focusing on liquidity is essential," he stated. He also mentioned that despite a slowdown in GDP growth, India is expected to continue on a path toward 7% growth. While U.S. tariffs may create some obstacles for growth, Mishra believes their impact on India will be limited due to the country's decreased reliance on global economic trends over the past decade.
Mishra elaborated that achieving a 7% growth rate is crucial for India, attributing this trend growth to various factors: 1% from labor growth, 2% from improvements in productivity, and 4% from capital formation. He concluded by highlighting that much of this growth will stem from domestic sources despite global economic fluctuations.VB