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Source: www.asiaecon.org |

INDIA CUTS INTEREST RATES FOR THE FIFTH TIME SINCE OCTOBER


  To everyone's surprise, The Reserve Bank of India cut interest rates for the fifth time since October. In an attempt to further stimulate the economy, the central bank cut the repurchase and lending rate by half a percentage point to 5.0 percent. The borrowing rate, or the reverse repurchase rate, was also trimmed by an equal amount to 3.5 percent.   Now that the repurchase rate – the rate at which it makes short-term loans to commercial banks – as well as the reverse repurchase rate – the rate it pays commercial banks on their deposits – have fallen, the Reserve Bank of India hopes to see commercial banks utilize interest rates on loans to mobilize their cash to fuel India's wailing economy. In addition, investors in interest rate-sensitive sectors such as automobile, real estate, and retail may feel a spur in demand from customers.


 

To everyone’s surprise, The Reserve Bank of India cut interest rates for the fifth time since October. In an attempt to further stimulate the economy, the central bank cut the repurchase and lending rate by half a percentage point to 5.0 percent. The borrowing rate, or the reverse repurchase rate, was also trimmed by an equal amount to 3.5 percent.

 

Now that the repurchase rate – the rate at which it makes short-term loans to commercial banks – as well as the reverse repurchase rate – the rate it pays commercial banks on their deposits – have fallen, the Reserve Bank of India hopes to see commercial banks utilize interest rates on loans to mobilize their cash to fuel India’s wailing economy. In addition, investors in interest rate-sensitive sectors such as automobile, real estate, and retail may feel a spur in demand from customers.

 

The need for expansionary policy is ever present in the global downturn, especially for the once-booming economy of India. India was growing at an average of 9 percent in the past four years, but now facing the brunt after trade, as a percentage of GDP, rose to 35 percent in the year ending March 31, 2008, from 21 percent in 1997-98. The nation’s exports declined last quarter for the first time in seven years, hindering India’s growing export industry.

 

Rajeev Malik, regional economist at Macquarie Group Ltd. in Singapore, believes that the Indian budget deficit is something to pay attention to. “Such sizable budget deficits are unsustainable, the next government will have to focus on fiscal consolidation and privatization in a big way”.

 

Standard & Poor’s also agreed, changing the nation’s credit rating outlook to negative from stable, as government debt reaches a level that’s non-sustainable. Mukherjee from Standard & Poor’s said, “the rating company’s move was ‘not expected’, and the global decline requires extraordinary steps from the government”.

 

India also has trimmed taxes and promised to spend $4 billion since December. While those direct stimulus measures are meager by global standards, India has been spending heavily on loan waivers for poor farmers, fuel and fertilizer subsidizes, and increased pay for civil servants — all of which have quietly helped boost consumption.

 

Unlike China, however, India’s large fiscal deficit hinders its ability to rely on fiscal expansionary policy to stimulate economic growth.

 

Although in need of an economic boost, India is limited to monetary policy as expansionary fiscal policy may do more harm than good due to its unsustainable budget deficit. In the fiscal year ending March 31, fiscal spending will widen to 6 percent of GDP from a target of 2.5 percent. In addition, the government expects borrowing next year to increase to a record 3.62 trillion rupees ($72 billion). Indian government debt is equivalent of 80 percent of the nation’s GDP<!—I would recommend saying ”...3.62 trillion rupees ($73 billion), increasing its debt to 8- percent of the nation’s GDP”—>.

 

According to Standard and Poor’s, India’s total deficit this fiscal year could hit 11.4 percent, a little more than double the percentage points from last year.

 

India’s economy grew by 5.3 percent in the three months ended Dec. 31 from a year earlier, the slowest pace in six years, and the government estimates that growth in the financial year ending March 31 might slow to 7.1 percent from 9 percent last year. Across the board, companies are trimming production and laying off workers, which is likely to be a major issue in national elections that begin next month.

 

The Reserve Bank of India commented, “India’s growth trajectory has been impacted both by the financial crisis and the follow-on of global economic downturn”.

 

In the midst of economic troubles, India still remains positive primarily focusing on the rapid decline of inflation. Despite expansionary monetary policy, the inflation rate has more than halved from the 13-year highs reached during 2007, giving the Reserve Bank of India room to focus on the economy. The rapid decline in inflation also helped to strengthen interest cuts by providing enough economic ground for banks to revisit their deposit and lending rates.

 

Source: www.AsiaEcon.org
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Source: www.asiaecon.org |


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