The Monetary Policy Thriller: Why ‘Cheap Money’ Doesn’t Always Spur Growth

The aroma of freshly brewed chai hung in the air, a comforting blanket against the morning chill.

I sat across from Rohan, a seasoned industrialist whose steel factory was a beacon of India’s manufacturing prowess.

He gestured towards the silent machines in a corner of his expansive plant, a testament to idle capacity.

He began, “You know, they say interest rates are low, money is cheap.

But my gut, and my balance sheet, tell me something else.

It feels like everyone’s shouting ‘borrow, invest!’ but the actual orders?

They’re just not there.”

His words echoed a quiet frustration, a sentiment I’ve heard from countless business leaders navigating the intricate dance of monetary policy.

It’s a far cry from the simple, feel-good story we often hear, where every rate cut is a magic wand for growth.

In short: Cheap money doesn’t automatically create economic growth because businesses invest based on strong future demand, not just low interest rates.

Factors like poor transmission of rate cuts, corporate debt repayment, and the unintended rise of “zombie firms” in India highlight this complex reality.

Why This Matters Now: Beyond the Textbook Rom-Com

For most of us, especially those peering in from the sidelines of the global economy, monetary policy often feels like a simple romantic comedy.

The central bank, in its wisdom, cuts interest rates; loans become cheaper; businesses and consumers, like lovestruck protagonists, spend more; and presto!

The economy gallops towards a happy ending.

Every textbook, every economic news snippet, loves to tell us this tale.

But in the real world, especially in dynamic economies like India, the script of monetary policy often veers into the territory of an Abbas-Mastan thriller.

There are hidden layers, unexpected twists, and outcomes that defy the typical narrative.

The notion that cheap money automatically fuels economic growth is a deeply ingrained belief, yet its real-world application often yields surprising and, at times, contradictory results.

This isn’t just academic; it directly impacts investment decisions, market stability, and the overall prosperity we strive for.

In India’s current economic scenario, the complexities of this ‘cheap money paradox’ are particularly evident.

The Reserve Bank of India (RBI) initiated a 100 basis points (bps) rate cut this year (NDTV Profit, 2025), yet its impact on stimulating broad-based growth remains a subject of intense observation and debate.

Understanding these nuances is crucial for any business leader, investor, or policymaker today.

The Demand Conundrum: More Than Just the Cost of Money

Let’s be honest.

Firms don’t wake up one morning and decide to expand just because interest rates have nudged down a percentage point.

Businesses invest, they innovate, they hire, when they see a compelling reason to.

That reason, more often than not, is strong future demand.

Think about it: why would Rohan expand his steel factory, buying new machinery and hiring more hands, if his existing capacity is more than enough to meet current orders?

This brings us to a fundamental insight: Corporate investment is primarily driven by strong future demand, rather than merely lower interest rates (Article Author, 2025).

The implication for policymakers and business leaders is clear: focusing solely on rate cuts without addressing underlying demand-side issues is akin to pushing on a string.

For businesses, this means that while financing costs are important, understanding market appetite, consumer confidence, and future growth projections should remain the north star of investment strategy.

The Invisible Brake: Aggressive Cuts and Caution

Sometimes, the very act of aggressively cutting rates, intended to spur activity, can backfire.

Businesses, always with an eye on the bigger picture, might interpret such drastic moves as a sign of underlying economic distress.

It’s a subtle psychological twist: rather than signalling opportunity, it signals caution.

This heightened wariness can lead firms to delay rather than accelerate investment decisions, further dampening the intended stimulative effect.

It’s a testament to the fact that economic signals are not just about numbers; they’re deeply intertwined with perception and confidence.

The Transmission Twist: When Central Bank Signals Don’t Reach the Ground

Imagine the RBI headquarters in Mumbai announcing a significant rate cut.

The headlines buzz.

Yet, on the streets, in your nearest bank branch, the cost of a home loan or a corporate loan remains stubbornly high.

This isn’t a glitch in the matrix; it’s a phenomenon known as the “transmission twist.”

Central bank rate cuts, such as the RBI’s 100 bps cut (NDTV Profit, 2025), may not effectively lower lending rates if long-term bond yields remain high and banks prioritize margins or safer government investments.

The reality is that banks don’t just follow the central bank’s lead in lockstep.

They’re guided by a complex interplay of factors, most notably long-term bond yields, which act as a benchmark for their own lending rates.

If bond markets anticipate higher inflation or increased government borrowing, they’ll demand higher yields, irrespective of the central bank’s short-term rate cuts.

Furthermore, banks are businesses, too.

They need to protect their margins.

While they might cut deposit rates due to surplus liquidity, they often hesitate to lower lending rates if they can earn better, safer returns by investing in government bonds.

This practical reality means that even with the central bank’s best intentions, the ‘cheap money’ might get stuck in the financial system’s plumbing, never quite reaching the businesses and consumers it was meant to energize.

For businesses, this means securing financing can still be challenging despite official policy, necessitating careful cash flow management and alternative funding exploration.

The Paradox of Prudence: Repaying Debt, Not Investing

Here’s another unexpected turn in our monetary policy thriller.

You’d expect cheap money to encourage more borrowing, right?

More loans, more expansion.

But often, the opposite occurs.

Many firms, seeing an opportunity to reduce their financial burden, opt to repay existing, often higher-interest, loans.

The extra cash flow generated from lower interest rates isn’t being channeled into new investments but into strengthening their balance sheets.

This corporate deleveraging and cash hoarding reduces the direct stimulative effect of cheap money on productive investment and economic activity (NDTV Profit, 2025).

In India, this trend is palpable.

In FY25, over 300 Indian companies reportedly turned debt-free.

More strikingly, the collective cash pile of Indian companies doubled by the end of the year, reaching over 14 trillion INR as of September 2025, a 12% increase from a year prior (NDTV Profit, 2025).

While debt reduction and stronger balance sheets are positive for individual companies, this widespread corporate behavior, when cheap money is intended for growth, signals a broader lack of confidence in immediate expansion opportunities.

It’s a strategic, albeit paradoxical, move: firms prioritize financial resilience over immediate growth-driven borrowing.

For operations and strategic planning, this means that even with available capital, market leaders might choose cautious consolidation over aggressive expansion until demand signals become unequivocally strong.

The ‘Zombie Firm’ Problem: The Unseen Cost of Perpetual Cheap Money

The side effects of cheap money can be insidious, quietly weakening the very economic potential it aims to boost.

One such phenomenon is the rise of ‘zombie firms.’

These are struggling businesses that, under normal circumstances, would likely fail, freeing up their labor and capital for more productive ventures elsewhere.

However, prolonged low interest rates can lead to banks extending credit to struggling firms (forbearance), creating ‘zombie firms’ that trap productive resources (NDTV Profit, 2025, citing Bank of International Settlements research).

Instead of forcing these firms to confront and fix their underlying problems, banks, encouraged by low borrowing costs and and perhaps a reluctance to acknowledge bad loans, keep rolling over their credit.

This practice, known as forbearance, keeps the lights on for companies that are effectively dead, preventing the natural churn and reallocation of resources vital for a dynamic economy.

This ‘zombie-firm’ problem was notably observed in advanced economies and in India following the 2008 financial crisis.

The implication is profound: this can undermine an economy’s potential by misallocating labor and capital, ultimately pulling down overall growth (NDTV Profit, 2025).

For business leaders, this means navigating a competitive landscape potentially skewed by less efficient players, making true innovation and market-driven growth harder to achieve.

Ethical business practices must ensure transparency in lending and borrowing, avoiding systemic risks.

What If the RBI Cuts Rates Again? Risks and Trade-offs

The question looms: should the RBI cut rates further?

Given low inflation and weak demand, there’s a theoretical case for it.

However, the uncertainties outlined above suggest the effects could be minimal or even counterproductive.

One critical concern is the interest rate gap between India and advanced economies, which has narrowed significantly from a historical average of 5% to just 2% points (NDTV Profit, 2025).

Further rate cuts would make India a less attractive destination for international investors, potentially triggering capital outflows and exerting more pressure on the rupee.

This delicate balance between stimulating domestic demand and maintaining currency stability is a tightrope walk for any central bank.

While rate cuts aren’t entirely pointless—they certainly reduce EMI burdens, providing much-needed breathing room for households and businesses during global uncertainties—their broader economic impact is diluted when demand is low.

In such scenarios, cheap money often seeks refuge in assets like equities, properties, and gold, fueling speculation and asset price inflation, rather than flowing into productive investments.

We see asset prices soar, but the underlying economy, the real economy, struggles to follow suit.

This means operations leaders must understand that market valuations may not reflect fundamental economic health.

Playbook You Can Use Today

Navigating an economy where ‘cheap money’ isn’t a silver bullet requires a proactive and nuanced approach.

Here’s a playbook for business leaders:

• Prioritize Demand-Driven Investment: Don’t invest just because money is cheap.

  Conduct rigorous market research to gauge actual and future demand.

  Firms don’t invest because interest rates are lower.

  They invest when future demand looks strong (Article Author, 2025).

• Optimize Capital Structure: Use periods of lower rates or improved cash flow to strategically repay existing high-cost debt, as seen with over 300 Indian companies in FY25 (NDTV Profit, 2025).

  This strengthens your balance sheet.

• Hedge Against Transmission Gaps: Acknowledge that central bank rate cuts may not fully translate to your lending rates.

  Explore diverse financing options and cultivate strong banking relationships to negotiate favorable terms.

• Focus on Productivity and Efficiency: In a competitive landscape potentially skewed by ‘zombie firms,’ relentlessly pursue operational excellence.

  Invest in technologies that enhance efficiency and output per unit of input.

• Monitor Asset Bubbles: Be aware that cheap money, when not entering productive investment, can inflate asset prices.

  This impacts procurement costs for assets like real estate and can signal broader market risks.

• Maintain Strong Cash Reserves: Given economic uncertainties and the tendency for firms to hoard cash (over 14 trillion INR as of Sept 2025, NDTV Profit), building healthy cash reserves provides a buffer and strategic flexibility.
• Advocate for Demand-Side Policies: Engage with industry bodies and policymakers to highlight the need for measures that directly stimulate consumer and business confidence and demand, beyond just monetary easing.

Risks, Trade-offs, and Ethics

The primary risk is misinterpreting central bank actions.

Assuming rate cuts guarantee growth can lead to over-leverage or ill-timed expansions.

A key trade-off for policymakers is balancing domestic stimulus with currency stability; aggressive rate cuts could trigger capital outflows, impacting the rupee (NDTV Profit, 2025).

Ethically, the proliferation of ‘zombie firms’ raises questions about efficient resource allocation and fair competition.

Businesses must resist the temptation to prop up failing ventures if they drain productive resources from the broader economy.

Mitigation involves robust internal demand forecasting, dynamic financial modeling, and a commitment to competitive, innovation-driven growth rather than reliance on perpetual cheap credit.

Tools, Metrics, and Cadence

To effectively navigate this environment, a robust analytical stack is essential.

Tools:

Market Intelligence Platforms for real-time demand signals, consumer sentiment, and competitive analysis.

Financial Modeling Software to assess cash flow scenarios, debt servicing capacity, and investment ROIs under various interest rate regimes.

Supply Chain Analytics to identify potential bottlenecks or opportunities for efficiency gains.

Key Performance Indicators (KPIs):

Capacity Utilization Rate to assess if existing resources are being fully leveraged before considering expansion.

Cash Conversion Cycle to optimize liquidity and operational efficiency.

Return on Capital Employed (ROCE) to ensure investments are generating sufficient returns, especially with cheap capital.

Debt-to-Equity Ratio to monitor financial health and risk exposure.

Customer Acquisition Cost (CAC) & Lifetime Value (LTV) to gauge true demand and marketing effectiveness.

Review Cadence:

Quarterly for comprehensive financial and market sentiment review, adjusting capital allocation and investment plans.

Monthly for liquidity and cash flow management, checking for any early signs of asset inflation.

Bi-weekly/Weekly for sales forecasting and operational efficiency checks to respond quickly to demand fluctuations.

FAQ

How do I know if my business should invest when interest rates are low?

You should primarily invest when you anticipate strong future demand for your products or services, not solely because interest rates are low.

As an Article Author (2025) states, Firms don’t invest because interest rates are lower.

They invest when future demand looks strong.

What is the ‘transmission twist’ in monetary policy?

The ‘transmission twist’ refers to situations where central bank rate cuts don’t effectively translate into lower lending rates for businesses and consumers.

This can happen if long-term bond yields remain high or banks prioritize their margins and safer investments in government bonds (NDTV Profit, 2025).

What are ‘zombie firms’ and why are they a problem?

‘Zombie firms’ are struggling businesses that stay afloat due to prolonged periods of low interest rates, often through banks continuously rolling over their credit (forbearance).

This is problematic because it traps labor and capital in unproductive ventures, hindering overall economic growth and efficient resource allocation (NDTV Profit, 2025, citing Bank of International Settlements research).

Why would companies repay debt instead of investing when money is cheap?

Many companies opt to repay existing, often higher-interest, debt and accumulate cash reserves (NDTV Profit, 2025).

This is a strategic move to strengthen their balance sheets and improve financial resilience, especially when they perceive weak future demand or economic uncertainty, making new, productive investments less attractive.

How does a narrowing interest rate gap affect India’s economy?

A narrowing interest rate gap between India and advanced economies, from a historical 5% to 2% points (NDTV Profit, 2025), makes India less attractive for global investors.

This could trigger capital outflows, putting downward pressure on the Indian rupee and creating financial instability.

Conclusion

The cinematic analogy holds true: ‘cheap money’ might be cast as the hero in our economic story, but it cannot deliver a blockbuster performance alone.

The entire ensemble cast must align—high confidence in the economy, robust corporate balance sheets, and a healthy risk appetite from banks (Article Author, 2025).

Rohan’s quiet factory, despite the promise of cheap loans, stood as a poignant reminder that economic growth is a nuanced symphony, not a solo act.

Until all these elements harmonize, excess money may simply swirl within financial markets, bolster the cash reserves of already large companies, or sit idly with the central bank.

That’s not the dynamic, inclusive growth story any of us are truly rooting for, is it?

It calls for a deeper understanding, a more human-centered approach, and a strategic leadership that looks beyond the obvious.

References

NDTV Profit. (2025).

Cheap Money Doesn’t Automatically Create Growth | The Reason Why.