If, however, financial markets are unstable or financial institutions and investors become excessively cautious in taking risks, financial intermediation will not function properly, and the effects of the reduction in the policy interest rate will not spread to the whole economy as intended.
This is evident from the substantially lower coefficient of variation of real GDP growth during the post-reform period as compared to that during the pre-reform period, that is, before the nineties. It is also important to note that India's growth is driven by domestic consumption, contributing on an average to almost two-thirds of the overall demand, while investment and export demand are also accelerating.