Five major central banks slashed interest rates on Thursday.
The Reserve Bank of India (RBI) is expected to follow suit on Saturday with a deep cut in its policy rates. There is now a growing case for lower rates in India: The economy is slowing and inflation—at least in terms of wholesale prices—is dropping.
But there are certain risks that RBI needs to be careful about. First, the battle against inflation has not yet been won. Second, there is a danger that RBI may run out of ammunition too soon in case this is a protracted slowdown. The US is already facing that problem, with target interest rates too close to zero. Third, there has to be recognition that not all the problems, which firms face right now, are because of the lack of cheap credit.
Exports have suffered because of the collapse of global demand, while some sectors such as real estate and aviation took too many risks in the boom. Some of the demands from industry lobbies are self-serving.
However, on balance, a meaningful cut in rates is needed to boost confidence.