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Fiscal measures more effective than rate cuts: Morgan Stanley

Last Updated: Wednesday, June 13, 2012 - 00:38

New Delhi: Global financial service provider Morgan Stanley Tuesday said fiscal measures would be a more effective tool to lower cost of funds than RBI's intervention in the form of a rate cut.

"We believe that for an effective reduction in the cost of capital, the efficient cycle would be reduction in public expenditure (fiscal deficit) which helps to reduce consumption; increase savings and thus lowers the current account deficit and inflation pressures," Morgan Stanley said in a report.

This eventually would help to reduce the actual cost of borrowing in the banking system, it said.

The underlying growth is slowing (even if the magnitude may be less than that indicated by IIP). Hence, it is possible that the RBI cuts policy rates (repo rate) further on June 18 by 25 basis points, it said.

However, it said, the more important question would be when the actual cost of borrowing in the banking system will come down.

Monetary policy will be less effective in dealing with the effects of a stagflation-type environment, it said.

Stagflation is a situation in which the inflation rate is high, the economic growth rate slows down, and unemployment remains steadily high.

"However, we believe that the government's current policy stance will keep the fiscal deficit high and therefore the current account deficit and inflation will remain a challenge making it difficult to lower the short-term cost of capital meaningfully," it said.

This would lead to further deceleration in credit growth and investment growth which would then lower the current account deficit and therefore help to lower the effective cost of capital, it added.


First Published: Wednesday, June 13, 2012 - 00:38
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