India’s Central Bank has cut interest rates for the first time in three years to give fresh momentum to a slowing economy. The government hopes it will revive confidence in an economy that many fear is losing its sheen.
The Central Bank announced Tuesday it will cut interest rates by half a percentage point from 8.5 percent to 8 percent. The reduction was larger than expected.
The Central Bank says it has lowered interest rates because economic growth has slowed to less than what it believes is its long-term trend rate.
Economic growth slipped to less than 7 percent last year. Many believe that 13 successive rate hikes since March 2010 contributed to the slowdown in an economy that had been racing ahead at almost 9 percent.
Finance Minister Pranab Mukherjee hopes the Reserve Bank’s measure will help the economy to rebound.
"The growth outlook, which had weakened in these past months, should now improve. The monetary policy announcement should help in investment revival and contribute to strengthening business sentiment,” he stated.
Business leaders have welcomed the cut in interest rates and expressed confidence that it will encourage more aggressive investment. More expensive credit had slowed domestic demand for homes and cars.
But worries remain. The Central Bank has warned it may not be able to cut interest rates any further if the government does not take steps to control a high budget deficit.
A higher bill for food and fuel subsidies, and higher spending on rural welfare programs, have put the government’ finances under strain.
N. R. Bhanumurthy, at the National Institute for Public Finance and Policy in New Delhi, says it is critical for the government to shore up its finances.
“The biggest downturn risk is the seriousness of the government in containing the deficit, particularly the subsidy bill. They are expected to bring it down sharply, he said. "If that does not realize, I think the scope for monetary policy to play as a growth measure is going to be very limited.”
The government is hoping that growth will improve this year to over 7 percent.
India is Asia’s third largest economy, and was widely seen as one of the engines that could help a global economic revival. But the recent slowdown has dented some of that that optimism.