The government hopes this selective stimulus will give a boost to capacity addition, employment and production, helping spur growth that fell to a four-year low of 4.4% in the first quarter of the fiscal.
The decision was taken at a meeting between Finance Minister P Chidambaram and RBI Governor Raghuram Rajan on Thursday. Economic Affairs Secretary Arvind Mayaram was also present during the discussions.
The government will increase the capital support to banks from the budgeted Rs 14,000 crore to help them lower interest rates on select category of goods identified.
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"While this will bring relief to the consumers, especially the middle class, it is also expected to give a boost to capacity addition, employment and production," the finance ministry said in a statement.
ET had on September 18 reported that the government was considering a mechanism to provide cheaper loans to auto and realty sectors.
Chidambaram will soon meet heads of public sector banks (PSBs) to impress upon them the need to lower interest rates in select sectors, including automobiles, to boost demand and revive sagging growth.
"Lower interest rates will depend on the lending capacity of banks. Banks will decide on sectors where lower rates will boost demand. I will meet bankers soon," Chidambaram said.
Experts dismissed concern that the government's measure to prop up demand would undermine the Reserve Bank of India's efforts to tame inflation. Raghuram Rajan had in his first policy unexpectedly raised the repo rate by 25 basis points as wholesale inflation climbed to a six-month high of 6.1% in August.
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