Continuing on my earlier article http://quantfinanceindia.blogspot.com/2016/05/real-interest-rates-india-vs-brazil.html.
Inflation is a necessary evil which has been trending lower from last few years, thanks to the work done by RBI & surplus agri production. Lower inflation has given the space for MPC to cut rates further & provide necessary incentive (reduced cost of capital) for businesses to increase investment.
Reduced inflation, is that causing slowdown?
Taking a leaf from RaghuRam Rajan's book, In the high inflation times - real interest rates stays negative which makes it easy for corporate to post growth in their EPS because increase in prices (read inflation) will be more than the interest they pay.
This takes economy to exuberance which is not good because the purchasing power of households reduces everyday and RBI has no option but to intervene and bring it(inflation) back to level which does not adversely impact households and bring stability to other macro economic indicators like currency rate.
By way of RBI actions, Once inflation start coming down - businesses will not be able to increase (much) the price of their goods that they use to do earlier, hence they don't have the incentive to borrow more & produce more since they will not able to make delta (increased profit - borrowing cost) from increased prices.
This reduces the rate at which profit grows and gives a feeling that there is a slowdown however this is nothing but a temporary adjustment which is required for the betterment of all stakeholders!
Other factors??
Younger generation is not interested in buying fixed assets and are happy to live with less strings attached life which technology is helping them to achieve.
More and more people are getting concerned about Environment and very soon industries which impact environment will not be there anymore or will have lesser customers!
