Indian Central Bank Cuts an Important Interest Rate to Increase Economic Growth

The Reserve Bank of India made an unexpected move by lowering lending rates by a quarter percent to help the government foster economic stability. This marks the second interest rate cut since January of this year.

The Reserve Bank of India made an unexpected move by lowering lending rates by a quarter percent to help the government foster economic stability. This marks the second interest rate cut since January of this year.

Commercial banks will be able to borrow from the central bank at a lowered rate of 7.5 percent. This comes on the heels of Finance Minister Arun Jaitley’s announcement that the government will increase spending for the year to kick-start the economy. The spending tailors to infrastructure projects, and Jaitley vowed that the state would keep an eye on its deficit. This also means that the fiscal deficit projection will be three percent GDP in three years, instead of two years as originally planned.

The central bank was at first reluctant to lower rates because of the country’s rampant inflation, and the bank feared that slashing rates would only make things worse. However, lower oil prices contributed to the slowdown in inflation, which emboldened the bank to cut rates. Inflation fell to 5.1 percent in January, which was below the government’s threshold of 8 percent for that same month.

India Can Go Forward or Backwards

Prime Minister Narendra Modi won by a landslide, which stemmed from his campaign promises of job creation and economic progress. India’s economy has been on the downturn since 2010, arising from corruption and government mismanagement. Investment in India has also lowered, which has placed the country in a precarious position. However, there is a light at the end of the tunnel. Analysts predict that India’s economy will grow 7.5 percent in 2015, making the economy the fastest growing large-scale market in the world. In addition, India could surpass China’s economic growth if it increases at a rate of 8.5 percent in 2016. This marks a major comeback for India, given its slow growth and a surging 10 percent interest rate in the last few years.

However, critics of this rosy figure note India’s current economic slump as reason why India may not beat China. With that said, the positive data can attract more investors to the country, which is something the country needs to maintain economic momentum.

What India Needs to Do

In reality, the central bank can do very little in regards to improving the economy. The best tool the bank has is to manage interest rates to keep high inflation at bay. Only the government can stimulate the economy in such a way that creates opportunity for the public at large. In addition, the country needs to reign in its debt while placing limits on spending. The world will have to wait and see if India can spend in the right areas as it embarks on a stimulus campaign.