The latest reduction in interest rates by the Reserve Bank of India (RBI) is not at all surprising.
The government said on Friday that the economy is now growing at its slowest rate in six years. The news from other parts of the world is even more gloomy. The economy needs another push.
The government is not in a position to do the job, for two reasons. One, the fiscal deficit is already so high that bond markets have been spooked and the private sector is being starved of money. Two, the code of conduct that prevents a government from taking any major policy decisions in the election season is in force.
That means RBI will have to shoulder most of the burden over the next few months, till a new government is in place in June.
The central bank will now have to use its firepower judiciously. The repo and reverse repo rates, through which RBI pours in and sucks out funds from the short-term money market, are at their lowest since 2000. There is now less space for dramatic rate cuts, in case the economy worsens in the months ahead.