RBI Repo Rate impact: Low inflation, cheap credit and strong growth still why farmers in trouble?

• India’s ‘Goldlock’ economy stable
• Domestic GDP growth of more than 8%
• Impact of low inflation on farmers’ income

RBI Repo Rate impact: India is currently experiencing a rare ‘goldlock’ economic situation, where gross domestic product (GDP) growth is above 8%, while consumer inflation (CPI) is at historically low levels. This situation has been strengthened by the interest rate cuts by the Reserve Bank of India (RBI). At first glance this balance appears to be entirely positive, but this economic relief does not affect every section of the country equally. Let’s understand who is really benefiting from this period and who is not.

‘Goldlock’: A combination of low inflation and high growth
In economics, a golden lock period is a situation when the economy experiences rapid growth, yet inflation remains under control. India is currently in a similar situation, with GDP growth estimated to hover around 8.2% in the latest quarter.

Due to the sharp drop in food prices, the rate of consumer inflation has fallen to just 0.25%, the lowest level ever. Wholesale inflation has also turned negative. According to Ranen Banerjee, partner at PwC India, soft interest rates have persisted during this period, boosting economic activity.

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Huge benefits to borrowers and companies
This year, RBI has cut the repo rate by a total of 1 percent. The reduction will directly benefit individuals and companies with floating-rate loans. When banks review interest rates, EMIs on home and car loans may come down, bringing relief to borrowers.

This environment is ideal for companies as demand is increasing, interest rates are low and inflation is expected. Cheap capital and strong demand encourage companies to pursue expansion plans, mergers and acquisitions (M&A), and new hires. In addition, lower interest rates reduce the government’s debt repayment burden, allowing it to spend more on infrastructure and welfare schemes.

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Pressure on farmers and pensioners
Even in the Goldilocks era, some sectors are suffering. The biggest impact of low inflation is on the income of farmers. Prices of vegetables (such as onions and potatoes) and pulses have fallen sharply in the wholesale market, giving farmers less than their cost of production. In many markets, the product is being sold below the minimum support price (MSP), which is affecting their income. If food inflation continues, rural demand will weaken, leading to unnecessary spending.

On the other hand, this interest rate cut is a cause of concern for retirees. They depend on interest income for their livelihood, and lower interest rates could further affect their already shrinking income.

The challenge of economic balance
The current situation supports investment and employment, but this balance is not sustainable until the farmers’ income crisis is resolved. Global investors and rating agencies have raised India’s growth forecasts, but the government will have to focus on policy measures to support rural demand for this scenario to be beneficial.