Consumption boost: Interest rates likely to stay low, says RBI governor

Kolkata: India is on a consumption hunt and one of the biggest triggers for elevated consumption levels is low interest rates in the economy. Fortunately interest rates are likely to remain low for a "long period” even as the economy continues to record strong rates of growth, Reserve Bank of India governor Sanjay Malhotra has said. Significantly, the growth rates can actually receive a shot in the arm once the ongoing discussions lead to fruitful trade agreements with the US and Europe.

"We are in a Goldilocks phase... Inflation is well below the lower end of our target range. Growth will moderate but remain robust. The last GDP number was surprising,” the RBI governor was quoted as telling the media. A Goldilocks period is used to describe a period in an economy when steady growth, low inflation and manageable interest rates converge to produce neither overheating nor slowing down.

Malhotra remarked that many were surprised by the GDP growth rate of 8.2% in Q2FY26 period. He even proceeded to admit that their economic forecasting skills need to be improved since they has predicted the growth figure to reach about 7% y-o-y in the July–September quarter. It became easy for the central bank to exercise the scissors in December since the retail inflation rate was at a multi-decadal low of 0.71%, well below 2% lower guidance limit for the central bank.

The year 2025 will go down in history as a year when the policymakers of the country pulled out all stops to trigger consumption in the economy, which was tepid for the past few quarters. First the Union finance minister announced significant income tax relief that put additional cash in the pockets of the salaried individual by making annual income up to Rs 12.5 lakh free from income tax. The income tax relief will also increase investments by households.

Another big bang kick to consumption came on September 3, when the GST Council announced a big wholesale cut in GST on about 91% of the goods and services. Two slabs -- 28% and 12% were altogether abolished and most of the items in these slabs were shifted to 5% and 18%. It led to a burst of consumption coinciding with the festive season. The government took care to ensure that all the companies and businesses transferred the full benefit to the end consumer.

On its part, RBI tried to help the cause of consumption throughout the year. It slashed the policy Repo Rate by 125 basis points and brought it down from 6.5% to 5.25%. After the last act of trimming the policy rate, at least half a dozen PSU banks from including SBI, PNB and BoB have transmitted the full benefit to consumers in the form of reduced interest rates on loans. They are not only supposed to help retail customers to get cheaper home loans, car loans, personal loans and education loans but also bring down the interest rates on loans for businesses.