Rate cuts not magic bullets': Raghuram Rajan flags structural hurdles: urges reforms

Time of India

4 days ago

Raghuram Rajan (TOI)
Former RBI governor
Raghuram Rajan
has cautioned that recent repo rate cuts by the
Reserve Bank of India
are not a 'magic bullet' for driving investments, emphasizing that multiple other factors also influence economic growth.
Rajan also noted that current interest rates are not excessively high and that the effects of the RBI's recent rate cuts will take time to materialize, reported news agency PTI.
"And as you correctly point out, (high) interest rates were an argument (earlier), but I do not think that can any longer be an argument.
I do not think that necessarily this (rate cuts by RBI) will be a magic bullet to propel investments," Rajan told PTI Videos.
On June 6, the six-member monetary policy committee, led by RBI governor Sanjay Malhotra, cut the benchmark short-term lending rate by 50 basis points, bringing the total rate reduction to 100 basis points in a short span. The committee also shifted its policy stance from accommodative to neutral and introduced liquidity-boosting measures.
Rajan was asked whether the recent repo rate cuts by the RBI would be enough to encourage corporates to ramp up their investment plans.
The noted economist said, "Some of the other factors, including creating more of a transparent sort of playing field and creating more competition in a number of sectors, will urge industry to be less complacent and more focused on investing to preserve their advantage and their lead".
"So, I do not think it is just interest rates. I think it is a combination of factors...But I hope that more corporate investment is forthcoming," he added.
Rajan also pointed out that India ink doesn't seem to be too willing in investing, in the aftermath of the great recession, in contrast to massive investment sprees, before that.
"They (Indian industries) have become much more circumspect, and they can not keep saying this is the condition of the domestic economy - earlier, they were saying the lower middle class is not spending, rural areas are not spending.
Now it is flipped over.
It is the upper middle class which is not spending," Rajan, currently a professor of finance at Chicago Booth, said.
The latest numbers put out by the ministry of statistics show private sector investment at a 11-year lows.
"And as you correctly point out, interest rates were an argument, but I do not think that can any longer be an argument," he said.
In FY24, the private sector's contribution to gross fixed capital formation (GFCF), a key indicator of investment in physical assets, declined to 32.4%.
When asked whether the RBI has room for additional rate cuts following the drop in CPI inflation to 2.1% in June, Rajan said he prefers not to comment on the central bank's policy decisions.
"Let me just say that we are in a very comfortable situation as far as inflation goes, and to some extent, the tariffs on imports in industrial countries, which may sort of propagate from the US to other countries, tend to be disinflationary for countries that export," the agency reported.
Rajan said although the central bank is targeting headline inflation, he wouldn't pay as much attention to headline numbers, rather take core inflation into account.
"But I would also take a look at core inflation at such times, just to satisfy myself that the disinflationary impulse is across the board.
"And if you look at core inflation, it is somewhat higher than the headline number," he noted.
CPI headline inflation fell to 2.1% in June 2025, the lowest year-on-year rate since January 2019, with crude oil prices remaining stable.
Food inflation stood at -1.06%, and assuming a normal monsoon, the RBI has projected FY26 inflation at 3.7%.
While referring to core inflation within the RBI's tolerance band, Rajan added, "Interest rates are not at this point overly high after the rate cuts that RBI has made, and we will have to wait for some more time to see how things play out".
When asked about the rise in net outward FDI, Rajan said FDI is complex and not limited to greenfield investments.
"It is not just people putting sort of money on the ground in greenfield projects," he noted, adding that "sometimes you know what they take out in terms of dividends, etc, counts negatively on FDI. I do worry about that."
Rajan emphasized that with many companies pursuing a China-plus-one strategy, "we should be getting much more of that kind of FDI." He added that India, particularly some southern states, should attract FDI seeking strong logistics and a skilled workforce
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