What is the effect of interest rate cut on inflation and the economy?

When we talk about interest rates in genearl, we are referring to the rate at which  other banks can borrow overnight from central bank to full fill their reserves requirements.

NOW, WHAT ARE THE EFFECTS IF RBI CUT THE INTEREST RATE:-


ADVANTAGES:---

• A drop in the interest rates will bring down the cost of capital of corporates.
• companies will borrow more to produce more, they will hire more workers reducing unemployment
• increasing wage rates
• This will also increase consumer spending and hence  consumption
• Increased consumption will add to aggregate demand which in due course of   time will reflect in India's GDP.
• The increased borrowing will boost up the real estate market as people will increasingly take advantage of the low interest rate to take home loans..     

                                     

           

DISADVANTAGES:-

• A decrease in unemployment will increase inflation correspondingly
• Increased consumer spending will increase price level of goods thereby increasing retail inflation.
• Everything will become expensive
• The biggest disadvantage is rising inflation. Rates should be reduced only if we feel we can handle the inflation.