India's central bank is taking action to cut its interest rates to the lowest level in five years in response to slowing inflation. The interest rate was lowered to 6.5% from 6.75%. This is the first cut that India has put in place since September. In addition, the cash-reserve ratio was raised from 90% to 95%. Recently, the Royal Bank of India has been purchasing back bonds from banks.
The decrease in inflation can be attributed to a slowdown in global food prices. Inflation is projected to remain around 5% into next year for India. The RBI would like to continue easing monetary policy even further. Also, India's factory output fell by 1.5% in January from December. Many economists agree with India's move to cut interest rates. Indonesia and China have also recently eased their monetary policy.
http://www.wsj.com/articles/indias-central-bank-cuts-main-interest-rate-1459836063
Its very interesting to see just how much each country's decisions really does affect other country's and their economic decisions. It would seem that as China, Indonesia, the US, and others have seen slowing growth it is beginning to hit India as well as a result. I think this ties in nicely to our course in that these big economies really do have an overall effect on the world economy as well and can somewhat bring about the reasons for some of these kinds of decisions as a result.
ReplyDeleteThis articles information may help to support the economic fact that the flow of capital goes from countries of high capital to countries of lower capital. In this case, the slowing of growth of large economic countries like the U.S. and China correlates to smaller surrounding countries (India, although India has been growing significantly recently). While these two big players in the world economy ease in growth, so does the emerging economy of India. It seems India is making very sound decisions because the significant effect of larger countries on smaller countries is real, as we are learning in our macroeconomics course. The economic decisions of smaller countries need to take into account the economic activity of the larger players (like the U.S.) in order to sustain economic prosperity.
ReplyDeleteIt is interesting to lower the interest rates while the inflation is slowing down.I am wondering how could this be possible. Since according to IS-LM curve model, when the Fed decrease money supply, the LM curve will shift to the left, which will eventually decrease output and increase the interest rates.
ReplyDeleteI think this is a very wise move by India. As a country that relies much on manufacturing and exporting goods, it is important that their investment stays high in their country. I believe that the lower interest rates with help combat the recent trend of poor factory output.
ReplyDeleteYeah I hand the same quandary, Lizheyin. Maybe its a momentary lull in things and in the bigger picture the IS-LM model explains it, but in the short term sometimes odd things happen that can contradict some of the models with have discussed. I don't know.
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