You know that RBI is the central bank and it gives short and medium term loan to the commercial banks. If this central bank will reduce the lending rates. It means to take loan from RBI will cheap. Its effect will be on the commercial banks. Commercial will also start to cut lending rates. Due to this, public will consume more loan. With this, productivity will increase. Except this, following are main reason of cutting Key lending rates.1. The factory output, measured in terms of the Index of Industrial Production (IIP), had declined by 3.5 percent in March. This was the main reason which are giving the news media. But it is also the matter of thinking, just cutting lending rate is enough for this. Instead of increasing production, people will get more loan for person needs. Due to this, we have to make a strict policy about the utilization of cheap loan.
2.The gross domestic product (GDP) had slowed to a nine-year low of 5.3 percent in the last quarter of the 2011-12 fiscal. More cheap loan may also decrease GDP if the same loan is not utilized effective way for generating new income.
3. Food inflation rose to 10.74 percent in May as compared to 8.25 percent in the previous month as vegetables, pulses and milk. I think there is not any relationship between lending rates and food inflation. There are lots of reasons like bad govt. policies, increasing petrol prices and export the food which are increasing the prices.
4.The overall inflation moved up to 7.55 percent in May as compared to 7.23 percent in the previous month.