Moneycontrol Pro Panorama | A welcome debate on interest rates

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Interest rates in India are the highest among major economies across the globe.

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Speaking at an event on Monday, November 18, Finance Minister Nirmala Sitharaman complained about high borrowing costs in India. Earlier, Piyush Goyal, Union minister of commerce and industry, argued for a policy rethink on linking monetary policy to volatile food prices and called for a cut in interest rates.

The comments by important Cabinet ministers in the central government come amid an acceleration in retail inflation and moderation in economic activity and corporate earnings.

Interest rates in India, as represented by 10-year government bond yields, are the highest among major economies across the globe. In Asia, India’s borrowing costs are similar to those in Indonesia, but are only significantly lesser than in Pakistan, show data of select countries compiled by The Economist.

The relatively high borrowing cost can seem unfair for the government, especially when they are pushing for a rapid capacity build-up in the domestic economy.

Still, it has to be seen if the central bank will accede to the government ministers’ demands. The recent rise in retail inflation has pushed the interest rate cut expectations in the market to the 2025 calendar year.

Even then, favourable interest rates and financial stability are crucial for long term development of India’s economy. Particularly in the current juncture of rising global uncertainty and soft external demand. It is important that policymakers balance the weakness in the external sector with supportive measures for important themes in the domestic economy, namely consumption and capital expenditure (capex).

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After a slowdown in September 2024 quarter, recovery hopes are now pinned on the second half of FY25. Consumption will play a key role in recovery. It is estimated to generate 60 percent of India’s GDP.

Demand in the rural economy is recovering. However, consumption in urban areas lagged in recent months. Favourable financial conditions and reduction in interest rates can not only help improve consumer spends but also aid capital investments.

“The recovery in private capex is strongly tied to the domestic demand environment. While a slower export growth environment will have some repercussions on growth, we expect resilience in domestic demand to provide support to corporate capex,” explain economists at Morgan Stanley.

Amid increasing global uncertainty, it is important that Indian policymakers maintain the focus on demand and economic growth.

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