Will Kerala's inflation concerns cloud RBI rate cut benefits?

Amid apprehensions over financial turmoil in the wake of Trump's punishing tariff revisions, the Reserve Bank of India has brought good news in the form of interest rate cuts. For Kerala, it could be a case of mixed feelings.

The state recorded the highest inflation in the country in February, reaching 7.61 per cent — a sharp increase from 6.76 per cent in January. According to the data released by the National Statistical Office, it was almost double the national average.

This high inflation in Kerala is a concern for many experts, even with the cut in the repo rate. Being primarily a consumer economy, most goods come from outside the state. The added logistics costs, among other factors, could negate the benefits of increased economic activity expected from the lower rates.

Consumer spending in the state is expected to increase, according to Prof Mary George, former chairman of the Kerala Public Expenditure Committee and former head of the Department of Economics at University College.

"The reduction in the interest rate will increase the availability of loans, which will drive economic activity. This will help small businesses and increase spending," she said. The impact on housing loans will also be profound, she added.

"Low interest rates are meant to encourage the availability of various housing loans, which will, in turn, boost employment opportunities in the field. Additionally, the real estate sector will benefit. However, the extent of the impact can't be predicted as of now," she said.

Professor Anitha Kumari of Gulati Institute of Finance and Taxation (GIFT) said middle- or lower-income families can now afford a house at a lower cost. "The cost of materials is also expected to come down, which will, in turn, boost the housing market," she said.

New borrowers stand to gain the most from the rate cut. As for the existing borrowers, only those who have opted for floating-rate loans will benefit. The interest rate on floating-rate loans changes according to fluctuations in the RBI repo rate. However, there will be no change for those who have opted for fixed-rate loans.

Mary George said that though the rate cut should naturally aid the startup sector and MSMEs, there needs to be a reality check regarding the ease of doing business. "If Kerala wants to reap benefits from the interest rate cuts, among other factors, the government must take action and create a more favorable environment," she said.