The traditional argument is that the lower the interest rate, the better for businesses as it brings down the cost of capital, making investments more attractive.

• Any government would love this as the country would then draw higher investments leading to higher growth and more job creation.
• Governments abhor higher interest rates as, theoretically, these push up project costs and keep investors away.
• Capital is one of the three main factors of production, which are critical to the growth of a commercial entity, the other two being land and labour.
• But capital is only a necessary, not sufficient, condition. Land, unless allocated by the local government, is too costly for investors seeking to set up shop.
• On labour, even if adequate hands are available for a job, the skill quotient is still low. Training graduates to be job-ready is a form of tax that companies pay.
• Also, to be taken into account is the market environment and demand. If end users are seeing lesser money in hand than earlier, demand will certainly be impacted.
• Therefore, in an environment where the other factors of production are not favourable for an investor, low interest rates by themselves may not prove attractive enough.
• Any revival of economic activity will be contingent on joint efforts by the government on the fiscal front to stimulate demand, and the RBI, to keep interest rates low.

Source: Sriram’s IAS