People don't want to borrow because they don't want to spend.

The Reserve Bank of India (RBI) reduced interest rate by 35 basis points yesterday,in an effort to stimulate growth in the economy. Apparently, the Monetary Policy Committee (MPC) considered a "standard 25 basis point (cut) might prove to be inadequate in view of the evolving global and domestic macroeconomic developments. On the other hand, reducing the rate by, say, 50 points might be excessive, especially after taking into account the actions already undertaken." The RBI maintained its accommodative stance indicating more cuts to come. Low interest rates make it easier for companies to borrow cheaply and set up new projects which create new jobs and thus enhance wealth. That is the theory. "I have had meetings with both public and private sector banks and the system is today ... flush with liquidity," said RBI Governor S Das. Banks do not like money to lie idle so if they have a lot of money lying around they will lend at lower rates anyway. "The answer must be that there's a much greater political short-run payoff from lower interest rates than from higher interest rates," wrote MJ Perry about low interest rates in the US. "That is borrowers (including corporations) must have louder and organized political influence than disorganized savers. In that case, aren't lower interest rates a form of legal plunder and crony capitalism...?" The biggest borrower is, of course, the government which is set to borrow Rs 7.10 trillion this financial year to pay for its expenses. Yields for 10-year government bonds have fallen from over 7.6% in March to 6.37% which reduces its interest payments. Out of the total expenditure of Rs 25 trillion in this year's Budget, revenue expenditure will be Rs 20 trillion, that is around 90%. Revenue expenditure includes "salaries, wages, pensions, subsidies and interest", which do not create any assets and so are considered wasteful. Retail inflation was 3.18% in June, which is below the 4% target set for the RBI. Crude oil prices have dropped into a bear market territory, which is defined as a drop of more than 20%. The RBI is confident of inflation remaining in its comfort zone because we import 84% of our oil consumption and a bear market in oil is highly beneficial. Lowering interest rate can only have effect if banks pass on the cuts to borrowers. Interest rate was cut by 75 basis points in the last few months but banks reduced their lending rates by only 11 points, wrote A Iyer. That is because when the government borrows so heavily, there is little left for the private sector. The RBI has to create trust which means "making the government more honest about fiscal deficit in the first place". Companies will start new projects only if there is demand. Growth in fast moving consumer goods (FMCG) is slowing down. People take loans to buy houses or cars but not to buy toothpaste or washing powder. You can force people to pay high taxes but you cannot force them to spend. Stalemate.