The Reserve Bank of India (RBI) reduced the repo rate in early February in an effort to make borrowing more affordable. However, some analysts suggest this may not be enough to improve credit growth. Neelkanth Mishra, Chief Economist at Axis Bank and a part-time member of the Prime Minister’s Economic Advisory Council, stated that improving liquidity would be a more effective strategy for supporting economic expansion.
Mishra noted that despite the rate cut, credit availability is still limited due to tight liquidity over the past 18 months. He stated that without addressing liquidity concerns, further rate cuts may not significantly affect lending.
Persistent Liquidity Shortage and Its Impact
Although the RBI has reduced the policy rate by 0.25 percentage points, the interest rate on one-year deposit certificates remains high at 7.8%. Mishra pointed out that the high marginal cost of funds prevents banks from lowering lending rates, limiting the effectiveness of rate cuts.
He also noted that market analysts had anticipated a cumulative 0.75 percentage point reduction in the policy rate across multiple adjustments. However, he reiterated that enhancing liquidity conditions would have a more direct effect on improving credit flow.
Outlook on Economic Growth
Mishra noted that the new RBI Governor, Sanjay Malhotra, has stated the need to provide adequate liquidity to the financial system. He suggested that adjusting the cash reserve ratio (CRR) could be a more impactful measure in addressing the current cash shortage.
He stated that if liquidity improves and fiscal policies remain stable, GDP growth could reach 7% in Q2 2025-26. While global economic challenges continue, he suggested that India’s growth is less reliant on international markets.
Implications for the Jewellery Industry
For jewellers, liquidity constraints in the banking system could affect access to credit for inventory and business growth. If lending remains tight, jewellers could encounter higher financing costs, affecting cash flow and investments.
Additionally, tighter liquidity could impact consumer financing for high-value jewellery purchases, potentially affecting sales. Industry stakeholders will observe RBI’s policy decisions to gauge their effect on lending and the economy.
