India’s central bank’s surprise decision to cut interest rates by 50bps will help boost trade and exports, experts say.

The Reserve Bank of India (RBI) caught analysts off guard by slashing the rate for the fourth time this year. It has now cut the rate by almost 125bps since the beginning of 2015, and it is hoped that this will help galvanise trade finance markets and accelerate lending.

“This will depend on whether the commercial banks will pass on the interest rate cuts and the demand for credit. Earlier this year the banks were criticised for not passing on the RBI rate cuts and therefore the transmission mechanism did not work. I think this occasion will be different. Already the State Bank of India has cut its base rate by 40bps and other banks are likely to follow in the next few days,” Sanjiv Shah, chief investment officer of Sun Global Investments, tells GTR.

Banks have said that for much of 2015, demand for credit has been low, due to a lack of final demand for products and services. It is hoped that the lower rate, combined with a rupee which has lost 10% of its value this year, should encourage companies to borrow as business confidence revives.

“Lower cost of borrowings will propel investments in the country, and will lead to creation of a positive, enabling environment,” Jahanwi Singh, India Exim

The RBI is hoping to buck a depressing trend through which exports have contracted for nine consecutive months to August, mainly on account of the global slowdown in demand. Cheaper credit should lead to a pick-up in investments in exports markets, which will ultimately make Indian companies more competitive.

Crucially, the cost of doing business in India is falling. Narendra Modi’s flagship industrial policies were focused on making it easier and cheaper to operate in India and analysts are confident that there are some shoots of success beginning to appear.

“Lower cost of borrowings will propel investments in the country, and will lead to creation of a positive, enabling environment. Moreover, India’s export competitiveness is also expected to improve. This will be beneficial for the Make in India initiative, which aims at promoting India as an important investment destination and a global hub for manufacturing, design and innovation,” Jahanwi Singh, research manager at India Exim, tells GTR.

The Make in India initiative was launched in September 2014, since when foreign direct investment (FDI) in the country has risen by 48%. Data from FDI Markets shows that India had the world’s highest greenfield FDI over the first half of the year, surpassing China and the US.

“This is an initiative to encourage significant foreign investment into Indian manufacturing, and to turn India into an export-driven economy. There have been some notable successes on this, but it is important for this to be judged over a longer period of perhaps two or three years before one draws any concrete conclusions,” Shah says.