Investment slowdown in India – an assessment

ABSTRACT

The contraction of investment activity in India in 2019-20 has generated an anxious search for possible drag factors, both cyclical and structural. This paper finds statistically significant sensitivity of investment activity in India to changes in interest rates. It highlights that the extent to which lower interest rates could be ensured through monetary policy to stimulate investment activity is bounded by constraints. Lower interest rates to spur investment activity that involves tolerance of higher inflation relative to the inflation target becomes particularly ineffective and counterproductive.

KEYWORDS:

• Investment
• Slowdown
• Interest Rate
• Monetary Policy

JEL CLASSIFICATION:

• E22
• E43
• E52

Disclosure statement

No potential conflict of interest was reported by the author(s).

Notes

1. Even as the inflation target was formally adopted in 2016 in India, for the entire sample period 4% inflation target has been used for generating the time series on CPI inflation deviation from the target.

2. The equations are also estimated with a dummy variable to capture the effect of demonetization in India during 2016:Q4. However, the estimated coefficient turns out to be statistically insignificant and the adjusted R² also drops slightly after the inclusion of this dummy variable. Therefore, results with demonetization dummy variable are not reported here.

Additional information

Notes on contributors

Sitikantha Pattanaik

Sitikantha Pattanaik is an Adviser in the Department of Economic and Policy Research (DEPR), Reserve Bank of India, Fort, Mumbai. (E mail: [email protected]).

Harendra Behera

Harendra Behera is a Director in the Department of Economic and Policy Research (DEPR), Reserve Bank of India, Fort, Mumbai. (E mail: [email protected]).

Rajesh Kavediya

Rajesh Kavediya is an Assistant Adviser in the Department of Statistics and Information Management, Reserve Bank of India, Mumbai. (E mail: [email protected]).

Arvind Shrivastava

Arvind Shrivastava is an Assistant Adviser in the Department of Statistics and Information Management, Reserve Bank of India, Mumbai. (E mail: [email protected]).