Lowering interest rates is seen a policy device to nudge the economy out of its sluggish growth phase. Introductory macroeconomic theory tells us that lowering interest rates will reduce the cost of funds, which in turn will induce firms to demand more, increasing firms’ investment, boosting aggregate demand and thereby encouraging economic growth. But this simplistic explanation suggests that the only reason firms are not investing is the high cost of funds. But is that the only reason? Will reduction in interest rates by itself help?
The NCAER Business Expectations Survey conducted in June 2019 asked firms about the credit
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