If there is no money, does it matter if it is cheap?

As expected, the Reserve Bank (RBI) cut interest rate by 25 basis points to 5.75%, apparently to boost economic growth by making it cheaper to borrow money. It also changed its stance to 'accommodative' from 'neutral', indicating more rate cuts in the future. However, a more important word is 'transmission' which means that banks do not lower cost of borrowing in tandem with the RBI lowering interest rates. "According to the central bank's own analysis, the weighted average lending rate of banks came down by just 21 points over the period that it slashed its repo rate by 50 basis points (from February till Thursday)." Trouble is, the government is the biggest borrower, leaving banks short of funds for private investors and pushing up costs. Next month's budget will be watched keenly for predicted fiscal deficit. "A daunting task awaits in FY20 with a Rs 1 trillion or 50 basis points slippage likely on the fisc even if goods and services tax (GST) collections rebound," said analysts. Unlikely, because consumers are refusing to spend. In a survey by the RBI, " The net share of respondents who think they will spend more, either now or a year from now, on non-essential items has fallen to an all-time low since September 2015, the earliest period for which this data is available," wrote R Kishore. If people don't buy goods or services no tax can be collected. Since, "Private Final Consumption Expenditure (PFCE) has had an average share of 56% in India's GDP between 2014-2015 and 2018-19. A decline in discretionary spending, such as on consumer durables, travel, or even eating out" will reduce GST collections. Merely reducing interest rate will not be enough if liquidity remains tight, wrote R Sivakumar. "Another shadow bank has missed a bond payment. That's a reminder to the new government that a mega-bailout of the country's distressed financial industry is now unavoidable," wrote A Mukherjee. "Nothing short of a Troubled Asset Relief Program, of the kind enacted by the US during the 2008 credit crisis, will restore confidence." "The Reserve Bank of India could establish special-purpose vehicles akin to the Federal Reserve's Maiden Lane instruments created to rescue Bear Stearns Cos. and American International Group Inc, or AIG." Increased government borrowing will decrease liquidity and increased fiscal deficit is inflationary. "Big businesses love cheap credit and so they like low interest rates; they don't worry so much about the inflationary consequences, which hurt the average consumer, not the captains of industry,' wrote Prof V Dahejia . "India is becoming the gold standard for monetary policy in Asia, if not the world," wrote D Moss. The proof of the pudding, as they say.