To boost Indian economic growth, The Reserve Bank of India (RBI) cut its repo rate from 6.5% to 6.25%, making it the first repo rate cut in over five years. The decision, long expected by many economists, arises as GDP growth slows to a four-year low of 6.7%, which fuels anxieties regarding the economic fate of the country.
Rationale Behind the RBI Interest Rate Cut
India’s economy, once the fastest-growing major economy in the world, has been witnessing a decline in investment growth, sluggish urban consumption, and shrinking corporate profits in recent months. In response, the RBI has instituted prompt monetary policy measures to fuel demand and promote borrowing.
A major supporting factor of the present action in the rate cut is moderate inflation, which has allowed the central bank to modify its policy without facing the risk of rapid cost increase. Furthermore, rural demand and vibrant agricultural production are predicted to help sustain the restoration of the economy.
Impact on Borrowers and Businesses
Owing to the decrease in the repo rate, consumers and businesses should see lower interest rates for loans, mortgages, and credit cards, resulting in cheaper costs of borrowing for companies. This shift is anticipated to stimulate private investments and increase purchasing power, going on to drive economic activity.
In a move to specifically tackle liquidity woes, the RBI has already injected into the banking system $18 Billion and also lowered the cash reserve ratio (CRR) of the commercial banks which will make more money available for lending.
Government’s Fiscal Strategy and Future Projections
RBI’s decision comes after the government’s $12 billion relief for the middle class in the form of tax relief. Nevertheless, monetary easing is a crucial tool in economic support when fiscal deficit becomes an issue that constrains additional government spending. Several economists forecast further rate cuts between 0.5 to 1% if the growth continues to slow.
RBI Interest Rate Cut: Potential Risks and Challenges
Despite the positive impact of rate cuts, challenges remain. Global economic volatility, in particular, trade disputes caused by the US-China trade war, remains a threat. Additionally, foreign investor outflows have led to a depreciating Indian rupee, which is currently trading near record lows. Additionally, RBI interest rate cuts have the potential to exacerbate a weakening of the currency leading to bills on imports and inflation.
