India: 10% inflation rate and 10% cash demand
The RBI has cut interest rates for the first time in two years to an all-time low of 5.25%.
It is forecasting a fall in inflation in March, which would also be the lowest in more than a decade.
However, the RBI has warned that a 10% fall in the cash market could hurt investors as banks are expected to increase their lending rates to protect their balance sheets.
“There is no doubt that a large amount of cash is being held in banks and that the cash balances of many of them have been growing very rapidly,” the RBI said in a statement on Friday.
“The effect of this may be to make the situation more volatile.”
The Reserve Bank has cut the cash rate for the year to 4.25% from 5.75% since December 1, 2019.
That is lower than the Bank of England’s (BoE) 3.5% and the central bank’s 2.75%.
The RBI has forecast that the government will spend around Rs 6,000 crore ($8,000) crore to reduce the cash supply this year.
It said the cash demand will fall by 1.5 percentage points in the year ahead, but the impact on the economy will depend on the actual situation and how the cash shortage affects growth.
The government will also spend around a trillion rupees ($9.4 trillion) to support the economy.