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India's economy is in such deep slump that lowering interest rates alone won't fix it -Rahul Menon

-Scroll.in/ qz.com

There are parallels between India’s economic situation today and the US experience of 2008.

The Indian economy is facing one of its most challenging times in years, and policymakers are responding to the crisis through monetary measures, such as tweaking key interest rates. But how far can this go in reviving growth?

On August 7, the Reserve Bank of India, in its bi-monthly monetary policy meeting, lowered its growth projection for the current financial year to 6.9%, from its earlier forecast of 7%. India has already lost its tag as the world’s fastest-growing major economy after GDP growth in the March quarter of financial year 2019 slipped to 5.8%.

Taking note of the sagging growth, the central bank cut the repo rate – at which it lends to commercial banks – by 35 basis points to 5.4%, the lowest level since 2010. A basis point is one-hundredth of a percentage point. This marks the fourth consecutive time the key interest rate has been slashed since February 2019.

The reasoning is that lower interest rates will reduce the cost of loans and stimulate falling consumption. The current economic slowdown has been widely attributed to tepid demand, which has, in the past been the key driver of growth.

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