It has been argued that interest rates have fallen to a decadal low in India which should help growth recover and allow the government to fund its borrowing at a cheaper cost in a non-disruptive manner.
While it is true that market rates have fallen sharply, are today’s market rates low enough in the context of the prevailing growth environment compared to that of a decade earlier?
The answer is a clear no.
Growth Now And Then
Let’s first compare growth conditions today to those that prevailed during the global financial crisis of 2008 when interest rates had fallen to similar lows.
In October-December 2008, just after the Lehman bankruptcy, real GDP growth moderated to 5.8% year-on-year from 8.5% and 9.8% in the previous two quarters. It slowed further to 3.5% in January-March 2009 period, which marked the bottom of growth in that cycle.
Nominal GDP growth had moderated to 10.9% in…