Large rate cuts can lower actual inflation and interest rates, which can in turn create expectations for more rate cuts.....

 Delay in rate cuts could delay investments, our RBI Governor probably wanted not to do it and by announcing the change in stance to neutral he linked further rate cuts with low inflation prints... In a low inflation and interest rate and expectations environment, subjects could delay spending which means actual low inflation and actual rate cuts, faster.... Price expectations are self-reinforcing... The governor probably wanted to skip interest rate cut expectations... But low inflation and expectations might increase rate cut expectations, but not sure... Larger interest rate cuts can indeed amplify expectations for future rate cuts by impacting both actual inflation and interest rates in a way that signals continued easing. This happens because lower interest rates reduce borrowing costs, potentially boosting economic activity and leading to lower inflation, which can then reinforce the perception that further cuts are likely.

1. Impact on Actual Inflation:

When interest rates are cut, it becomes cheaper for individuals and businesses to borrow money. This can lead to increased spending and investment, which can stimulate economic growth. Lower interest rates can also lower the cost of borrowing for businesses, potentially leading to lower production costs. This could translate to lower prices for goods and services, helping to curb inflation. If lower interest rates lead to a reduction in overall inflation, it reinforces the narrative that the central bank is successfully managing the economy and may be more inclined to further ease monetary policy.

2. Impact on Interest Rate Expectations:

A large rate cut can be interpreted as a strong signal from the central bank that it is concerned about economic slowdown and is willing to take aggressive action to stimulate growth. This can create expectations that more cuts are likely in the future. If the rate cut is successful in boosting economic activity and curbing inflation, it can increase market confidence in the central bank's ability to manage the economy, further solidifying expectations for future cuts. When markets anticipate further rate cuts, it can lead to a decline in bond yields. Lower bond yields can make it more attractive for investors to shift towards riskier assets like stocks, further fueling expectations of economic growth and additional rate cuts.

3. Feedback Loop:

Lower interest rates lead to increased spending and investment, which can further reduce unemployment and stimulate economic activity. This can create a positive feedback loop where lower rates lead to lower inflation, which leads to expectations of more cuts, leading to more spending, and so on. Reduced interest rates also lower borrowing costs for governments, which can free up funds for public spending and infrastructure projects, further boosting economic growth.

 Large rate cuts can lower actual inflation and interest rates, which can in turn create expectations for more rate cuts, creating a cycle of easing monetary policy. However, it's important to note that the effectiveness of this strategy can depend on various factors, including the overall economic conditions, the specific policies implemented, and the reaction of consumers and businesses.