The RBI has acted. Now the emotional economics must kick in.

The textbook logic is straightforward. Lower rates should ease borrowing costs. A reduced CRR increases lendable funds. These moves together create room for more credit, more investment, and more consumption. But the reality is more complicated. Transmission in the Indian economy has always been sticky, and now faces fresh hurdles. Banks already have liquidity. What they lack are credible lending opportunities and enough demand visibility to justify risk-taking.

Private sector capex continues to hesitate. Hiring is not keeping pace. Consumer demand, which drives over half the economy, has lost momentum. In Q4FY25, GDP rose by 7.4 percent, but private consumption slowed to 6 percent. Its share in GDP fell sharply. That kind of data doesn’t inspire confidence, either for lenders or for businesses deciding whether to expand.

MSMEs in particular, which should be borrowing to grow, remain tentative. They face high compliance burdens, delayed payments, and patchy access to structured capital. Despite a range of targeted schemes and credit incentives, many still find themselves locked out of adequate financing. There must be something we are missing—some underlying structural frictions that go beyond our narratives and policy optics. The question then is not just whether rates are lower. It is whether sentiment has recovered. It is whether the system trusts that demand will hold up long enough to justify a fresh round of private investment. It is also whether borrowers feel secure enough in their income prospects to take on more debt.

Surplus Liquidity, Scarce Direction

In an environment where demand is tepid, too much liquidity creates its own set of distortions. Banks, wary of adding low-return assets, may respond by lowering deposit rates. Not because their cost of funds has truly come down in a structural sense, but because they simply don’t want more liabilities. That nudges savers into riskier assets in search of yield. It also erodes the discipline of pricing long-term financial risk correctly.

Institutional investors and banks may also be tempted to chase returns wherever they can be found—often in short-duration market trades, speculative equity flows or structured credit products. These movements are already visible. Money market rates have softened, risk appetite has grown, but not always for the right reasons.

The impact on non-bank and fintech lenders could also be mixed. On one hand, they could benefit from lower cost of capital. On the other, they face competition from risk-on behaviour in the formal system, and from savers who may now demand higher yield alternatives. Non-banks cannot assume they will automatically win just because the system is flush with funds. They must prove credit discipline and scale responsibly. Being tech-enabled is not a substitute for being risk-conscious.

Growth Needs More Than Money—It Needs Conviction

Ultimately, liquidity is a necessary but insufficient condition for growth. What the Indian economy needs is a shift in confidence. Entrepreneurs need to believe that this is the time to invest. Households need to feel secure enough to spend. Boards need to feel they have enough visibility to approve new capital allocation. And bankers need to trust that there is a market for well-structured, long-tenure credit.

This cycle is not just about monetary signals. It is about emotional economics. The RBI has, in a way, passed the baton. But who is running with it? Are businesses scaling up? Are family firms, often the bedrock of India’s economic resilience, finding their risk appetite again? Or are they choosing caution over ambition? Or are they chasing global assets, due to available depressed valuations, and silently derisking a single geography or market exposure ?

That last shift is worth watching closely. Indian promoters and firms with global ambitions are increasingly scouting for acquisitions or stakes abroad—not just for growth, but as a hedge. Whether it is manufacturing capacities in Southeast Asia, fintech platforms in the Middle East, or distressed assets in Europe, there is a quiet but steady redirection of capital. Part of this is opportunistic. But part of it reflects deeper unease—about regulatory unpredictability, policy inconsistency, or the risks of concentrated exposure to a single geography. This too is emotional economics: not exuberance, but strategic retreat in the name of diversification. The question that arises here is one of political economy—are investors signalling a lack of long-term policy visibility or confidence in institutional consistency at home? If belief is the currency of growth, then the system must ask what signals it is sending to those with capital to commit.

Reforms Beyond the Rate Sheet

To truly unlock the growth impulse, we need more than just central bank intent—we need structural responsiveness. Regulatory reforms that reduce compliance friction for MSMEs could free up managerial bandwidth and improve creditworthiness. Streamlining processes, digitising filings, and reducing discretionary penalties would go a long way in turning policy liquidity into operating capital.

Second, India needs to accelerate public capital expenditure in a targeted and timely manner. Infrastructure spending remains one of the few tools that can crowd in private investment, generate employment and stoke local demand. But delays, cost overruns and lack of coordination often blunt the impact. A faster pipeline execution would send a strong demand signal to the rest of the economy.

Finally, payment discipline across supply chains must improve. Whether it’s delayed government disbursements, large corporate dues to vendors, or long receivable cycles in SME trade, the cumulative effect is economic drag. Ensuring timely payments—especially from the state—can often have more impact than policy pronouncements.

As of now, the liquidity is real. The intent is visible. But the system must respond. Because even the best-built bridge goes nowhere if no one chooses to cross it.