Question

The governmet has annoonced a 500million soft loan to SMEs due to the pandemic. Under this package interest rates have been cut to 0.5%. how will this package foe smes impact on GDP articulating rhe pathways. in your opinion can a low interest rate program lead to higher inflation?

Answer 1

The soft loan of 500 million given to SMEs during this pandemic, is a boost to the SME sector to set-off their losses incurred due to shutdown(lockdown imposed to contain the pamndemic). As this is a soft loan, this means the loan is provided at a interest rate lower than the market interest rate along with other benefits like moratorium on interest payments. This will help the SME sector to revive their production. The interest rate cut under this package to 0.5%, will help borrowers to take loans at lower interest rates. In the present scenario, where the world economy is moving towards a deep recession and demand for goods other than necessities, is very low. Thus, lowering the interest rate cut will not hamper the saving decisions much. And people are still limiting their expenditures. All these factors undertaken, in my opinion, this low interest rate program will not lead to higher inflation, as compared to a normal situation, where an interest rate cut will boost demand and thus expenditutre, leading to higher inflation.