Springing a pleasant surprise, Reserve Bank of India Governor Raghuram Rajan surpassed expectations by cutting the short-term lending rate by 50 basis points to a 4-1/2 year low of 6.75 per cent. There are obvious benefits to the cut. Housing, car and other consumer loans will become cheaper. This will perk up demand and consumption-led growth. However, pensioners and others dependent on interest-income will feel the blow. People will now be less tempted to keep money in banks since returns will decline. They may choose to spend or invest.
That said, another positive signal from Mr Rajan was his statement that the RBI and the Government of India are working together to turn around the economy. After a long time, both are on the same page. Both want to push growth and create jobs. Mr Rajan did not rule out a further cut but it will depend on prevalent conditions, especially inflation. Now the ball is in the Government’s court.