April 17th, 2012
11:46 AM GMT
(CNN) – For the first time in three years, India has cut interest rates in the face of flagging economic growth. In the year that ended on March 31, Asia’s third largest economy grew 6.9% – its slowest in three years.
India announced it would cut interest rates by 50 basis points. A 25-point cut had been widely predicted. This takes the subcontinent’s lending rate down from 8.5% to 8%. The hope is that lower interest rates will lower prices and allow more money into India’s economy – thereby encouraging growth.
Right now, signs of sluggishness are easy to spot.
Auto sales only grew about 2% in 2011. That was because of high interest rates and high gas prices.
And the Federation of Indian Chambers of Commerce and Industry, or FICCI, told me that three times as many private-sector projects were cancelled between March and December of last year – again because of high interest rates.
So there are clear reasons for today’s rate cut.
FICCI’s spokesperson in New Delhi, Rajiv Kumar, told me it’s “better late than never” but it could have been “bolder” and he would have been “happiest” if it was a full 1% point cut.
But that did not happen and it likely will not happen. Inflation is keeping the government cautious.
In the past year, India has been hit by protests because of rising prices. March inflation came in at 6.9%. Analysts expect that may rise in the coming months.
That’s partly because of India’s currency, the rupee. It’s near a three-month low against the dollar, trading at about 51 rupees to the greenback today. A weak rupee decreases India’s purchasing power, making it more expensive to buy imported goods.
Couple that with rising oil prices and that makes inflation worse. India relies on imported oil for nearly three-quarters of its needs. The price of oil had been hovering near two-month highs since about mid-February.
So India faces a balancing act as it enacts today’s 50-basis point rate cut. It’s trying to achieve growth without falling into inflation - and keeping its one billion people happy.
No small feat.
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