Can RBI’s Rate Cuts and Liquidity Push Jumpstart India’s Economy?

The Reserve Bank of India (RBI) has taken bold steps in 2025 to revive the Indian economy, slashing policy rates by 100 basis points and reducing the Cash Reserve Ratio (CRR) by another 100 basis points. These measures have infused substantial liquidity into the banking system. But a key question looms large—will this monetary easing be enough to reignite demand and put the economy back on a high-growth path?

A recent report by Nuvama raises doubts over the effectiveness of these measures, citing weak consumption trends and structural demand-side challenges. “Who will multiply the liquidity into money?” the report asks, pointing out that the transmission mechanism of monetary policy may be broken or significantly weakened.

The report argues that, unlike previous monetary easing cycles—such as in 2002 or post-2008—today’s environment lacks the complementary drivers of recovery, like robust fiscal spending or export surges. Fiscal policy remains restrained, with the government prioritizing debt reduction over stimulus. Tax revenue growth has also slipped below the rate of nominal GDP growth, further limiting fiscal headroom.

Meanwhile, corporate India is flush with free cash flows but remains cautious. Instead of investing, companies are focused on cost control and delaying capital expenditure, citing lackluster demand as the primary constraint, not access to funds. This puts the burden of demand revival squarely on households, whose ability to spend is hampered by stagnant incomes and high indebtedness.

The report notes a silver lining in GST collections, which crossed Rs 2 lakh crore in both April and May 2025. However, a significant portion of that came from import-related taxes, raising concerns about the sustainability of domestic demand.

 

Globally, the unusual decoupling of the U.S. dollar and Treasury yields has given emerging markets like India some breathing room to cut rates. But with the U.S. expected to narrow its trade deficit through tariffs, this window could soon close.

Experts believe that while the RBI’s proactive stance is commendable, it may not be enough. Without stronger fiscal support, real income growth, and an improvement in global trade dynamics, India’s economic recovery may remain slow and uneven.

Read This Also: Railways to Finalize Passenger Chart 24 Hours Before Departure