question_answer

One of the key factors that provide impetus to strong growth is Interest Rates. How do interest rates contribute to the growth of economy, particularly when these are lowered down?               [RBI 2009]

(1) It gives corporations the opportunity to prepay high-cost debts and replace them with fresh funds raised at lower rates.

(2) Banks use this opportunity to maximize profits on their treasury operations and these excess profits are used to clean their Balance Sheets by making higher provisions for NPAs or sticky loans.

(3) The Govt also gets benefited as it can borrow funds from open market at low interest rates and bridge its fiscal deficit.

A)  Only (1)

B)  Only (2)

C)  Only (3)

D)  All (1), (2) & (3)

E)  None of these