Cheap Money

Cheap money refers to a situation in which interest rates are low and credit is easily available, making it inexpensive for businesses and individuals to borrow funds. It is a monetary policy condition deliberately created by central banks—such as the Reserve Bank of India (RBI) or the Federal Reserve (USA)—to stimulate economic growth, investment, and consumption during periods of slow economic activity or deflationary pressure.
When money is “cheap,” borrowing becomes attractive, leading to greater spending and investment; conversely, saving becomes less rewarding because returns on deposits and fixed-income instruments are lower.

Meaning and Concept

The term cheap money originates from the idea that the “price” of money—its interest rate—is low. It is essentially the opposite of dear money, where interest rates are high and borrowing is costly.
Under a cheap money policy, a central bank increases the money supply in the economy through various instruments of monetary control, ensuring that commercial banks have enough liquidity to lend at lower interest rates. This helps revive economic activity by encouraging consumers to spend and businesses to expand production.
Cheap money is therefore a key tool in expansionary monetary policy, aimed at boosting output, employment, and aggregate demand.

Instruments Used to Create Cheap Money

Central banks use several instruments to create a cheap money environment:

• Reduction of Bank Rate / Repo Rate: The repo rate (rate at which the central bank lends to commercial banks) is lowered to reduce borrowing costs throughout the financial system.
• Lowering Cash Reserve Ratio (CRR) and Statutory Liquidity Ratio (SLR): These reductions increase the lending capacity of commercial banks.
• Open Market Operations (OMO): The central bank purchases government securities in the open market to inject liquidity into the banking system.
• Moral Suasion and Forward Guidance: The central bank communicates its intention to maintain a low interest rate environment, influencing market expectations and lending behaviour.
• Quantitative Easing (QE): In advanced economies, central banks may buy long-term securities and assets to infuse liquidity directly into the economy, keeping interest rates low over an extended period.

Objectives of Cheap Money Policy

A cheap money policy is generally adopted to achieve the following economic objectives:

• Stimulate Investment: By reducing borrowing costs, businesses are encouraged to invest in expansion, technology, and infrastructure.
• Boost Consumption: Consumers are motivated to take loans for housing, vehicles, and other goods, thereby increasing aggregate demand.
• Promote Economic Growth: Increased investment and consumption help raise output, employment, and national income.
• Combat Recession: In times of economic slowdown, cheap money acts as a counter-cyclical tool to revive economic activity.
• Support Government Borrowing: Lower interest rates reduce the cost of servicing public debt, helping the government manage fiscal deficits.
• Encourage Exports: Cheap money often leads to currency depreciation, making exports more competitive in international markets.

Advantages of Cheap Money

• Economic Revival: Revitalises economic activity during stagnation or recession.
• Encourages Investment: Businesses expand capacity due to low borrowing costs.
• Reduces Unemployment: Increased production creates more jobs.
• Eases Debt Burden: Helps both private and public sectors manage existing debt more easily.
• Supports Stock Markets: Low interest rates make equities more attractive than bonds or deposits.

Disadvantages and Risks

While cheap money can stimulate short-term growth, excessive or prolonged use can create economic distortions. Major drawbacks include:

• Inflationary Pressure: Excess liquidity and demand can push up prices.
• Asset Bubbles: Cheap credit often fuels speculative investment in real estate and stock markets.
• Currency Depreciation: Continuous monetary easing may weaken the domestic currency.
• Low Savings Rate: Reduced interest rates discourage savings, affecting long-term capital formation.
• Misallocation of Capital: Easy access to cheap credit can lead to inefficient investments or corporate over-leverage.

Hence, central banks must carefully calibrate the duration and intensity of cheap money policies to prevent overheating of the economy.

Cheap Money Policy in India

In India, the Reserve Bank of India (RBI) adopts a cheap money policy primarily through its monetary policy instruments, especially during economic downturns.

• During the COVID-19 pandemic (2020–2021), the RBI reduced the repo rate to 4.00% and introduced liquidity infusion measures under the Atmanirbhar Bharat package to support credit flow.
• The central bank also launched Targeted Long-Term Repo Operations (TLTROs) and moratoriums on loans to maintain liquidity and ensure the availability of cheap credit to businesses and households.
• However, from 2022 onwards, as inflationary pressures increased, the RBI gradually shifted from a cheap money stance to a tight monetary policy by raising interest rates to control price levels.

Thus, the cheap money approach in India is cyclical and applied selectively based on macroeconomic conditions.

Comparison: Cheap Money vs Dear Money

Global Examples

• United States: The Federal Reserve maintained near-zero interest rates and implemented quantitative easing (QE) following the 2008 global financial crisis and again during the 2020 pandemic to create a cheap money environment.
• European Union: The European Central Bank (ECB) also adopted negative interest rates and asset-purchase programmes to encourage lending and prevent deflation.
• Japan: Japan has maintained a cheap money policy for decades under its “Abenomics” strategy to counter long-term deflation and stagnation.

These global instances highlight that cheap money is a widely used economic tool for crisis management and recovery.

Conclusion

The cheap money policy is a fundamental instrument of modern monetary management used to stimulate growth, investment, and employment. By lowering interest rates and expanding credit availability, it helps revive economies during downturns. However, when maintained for too long, it can lead to inflation, asset bubbles, and macroeconomic instability.