This article reports that in January 15, 2015, the Reserve Bank of India (RBI) surprised the market by implementing expansionary monetary policy (EMP) and cut the interest rate, which reduces its “key repo rate by 25 basis points to 7.75 percent” to boost the economy. This is because the persistent decline in crude oil prices leads to lower demand in oil. Consequently, countries only gain low profit from selling oil, which the level of gross domestic product (GDP) result in a dramatic decline.
The disadvantages of cutting the interest rate and carry out EMP are the insignificance of economy development and leading of high demand for investment. Since 2015 January, India has cut its interest rate for three times. As a result frequent cutting is indicating to individuals that reducing the interest rate is not effective to bring up the economy and consumers could lose their faith to continue on investment. Furthermore, the stimulation in the short term result in high demand for investment, so there is less barriers to enter the market. As competition increases, the average level of price on each commodity decreases; however, more resources are consumed, so that it leads to a scarcity to the environment and is negative production externality and creates a welfare loss in the society. Hence, in a short term, the economy boosts, but it will lead to scarcity and decline in individual’s living standard. Similarly, in a long term, the consumers may lose their confidence in borrowing
The disadvantages of cutting the interest rate and carry out EMP are the insignificance of economy development and leading of high demand for investment. Since 2015 January, India has cut its interest rate for three times. As a result frequent cutting is indicating to individuals that reducing the interest rate is not effective to bring up the economy and consumers could lose their faith to continue on investment. Furthermore, the stimulation in the short term result in high demand for investment, so there is less barriers to enter the market. As competition increases, the average level of price on each commodity decreases; however, more resources are consumed, so that it leads to a scarcity to the environment and is negative production externality and creates a welfare loss in the society. Hence, in a short term, the economy boosts, but it will lead to scarcity and decline in individual’s living standard. Similarly, in a long term, the consumers may lose their confidence in borrowing