Get 40% Off
🤯 This Tech Portfolio is up 29% YTD! Join Now to Get April’s Top PicksGet The Picks – Just 99 USD

India central bank cuts rates again to try to speed up growth

Published 08/07/2019, 07:35 AM
Updated 08/07/2019, 07:35 AM
© Reuters. FILE PHOTO: CCTV cameras are seen installed above the logo of Reserve Bank of India (RBI) inside its headquarters in Mumbai

© Reuters. FILE PHOTO: CCTV cameras are seen installed above the logo of Reserve Bank of India (RBI) inside its headquarters in Mumbai

By Swati Bhat and Abhirup Roy

MUMBAI (Reuters) - The Reserve Bank of India (RBI) lowered its benchmark interest rates for a fourth straight meeting on Wednesday with a slightly bigger than expected cut, underscoring its worries about India's near-five year low economic growth pace.

The six-member monetary policy committee (MPC) cut the repo rate by an unconventional 35 basis points (bps) to 5.40%, just above a 25 bps cut predicted by 80% of the 66 analysts polled by Reuters last month.

The RBI's move came hours after the New Zealand central bank's decision to cut its rates by a steep 50 bps, and just before the Bank of Thailand surprised the market by cutting its benchmark.

"With inflation projected to remain within target, addressing growth concerns by boosting aggregate demand, especially private investment, assumes the highest priority at this juncture," Governor Shaktikanta Das told a news conference.

Asia's third largest economy grew at a significantly slower-than-expected 5.8% annual pace in the January-March quarter. And most analysts expect data due later this month to show that growth in April-June faltered even further.

SIGNAL OF CONCERN

The 35 bps rate cut is "a signal that the Reserve Bank of India's MPC is quite concerned with the growth outlook," said Suvodeep Rakshit, a senior economist with Kotak Institutional Equities in Mumbai.

Indeed, the RBI lowered its economic growth forecast to 6.9% from 7% for the current fiscal year, and said it sees inflation remaining inside its target range over a 12-month horizon.

Indian Finance Minister Nirmala Sitharaman, in a newspaper interview last week, expressed that she would like to see a "significant" reduction in RBI policy rates, in order to bolster a weak economy.

Asked about the unconventional rate cut size at a press briefing, RBI Governor Shaktikanta Das defended the move, saying the MPC viewed a standard 25 bps cut as being "inadequate in view of the evolving global and domestic macro-economic" conditions, while a 50 bps cut was seen as potentially "excessive", given past RBI actions.

Analysts said they still see scope for rate cuts as inflation is likely to remain muted.

"With softness in incoming data, we retain our call for another 25 bp cut, likely in the next quarter," said Radhika Rao, DBS economist in Singapore.

Earlier this week, Sitharaman said the government plans to take steps to improve the state of the economy "fairly quickly" after getting inputs from business leaders.

Das said the recent rate cuts in tandem with anticipated government moves should lift sluggish economic growth.

Markets were little changed as the RBI decision was largely in-line with expectations. The 10-year benchmark bond yield rose to 6.37% from 6.33% before the announcement, while the rupee was barely moved at 70.84 per dollar.

Losses for India's benchmark NSE Index (NSEI) increased after the rate announcement, with it closing down 0.85%.

GETTING BANKS TO CUT RATES

Four MPC members voted for the 35 bps cut, while two voted for a 25 bps cut, the RBI said. All members voted to keep the policy stance at "accommodative".

The MPC also cut the reverse repo rate to 5.15%.

With Wednesday's move, the RBI has cut the repo rate by 110 bps this year. Analysts say the real challenge remains getting India's banks to pass rate cuts to borrowers.

"The real issues are improving monetary policy transmission and reviving the non-banking finance companies sector; the policy does not provide any new measures or even perspectives on these areas," said Sujan Hajra, chief economist at Anand Rathi Securities in Mumbai.

State Bank of India (NS:SBI), the country's biggest lender by assets, cut its benchmark lending rate by 15 bps across all tenors shortly after the policy announcement. Since the start of the year SBI has cut rates by just 30 bps in response to RBI's 110 bps cuts.

"Unless the transmission is swift and full, we may not see a change in the consumption and investment trajectory," Sandip Somany, president of industry body FICCI said.

© Reuters. FILE PHOTO: CCTV cameras are seen installed above the logo of Reserve Bank of India (RBI) inside its headquarters in Mumbai

"It is equally important that the government front-loads its capital expenditure program for the current year and continues to push ahead with the reforms program".

Latest comments

Risk Disclosure: Trading in financial instruments and/or cryptocurrencies involves high risks including the risk of losing some, or all, of your investment amount, and may not be suitable for all investors. Prices of cryptocurrencies are extremely volatile and may be affected by external factors such as financial, regulatory or political events. Trading on margin increases the financial risks.
Before deciding to trade in financial instrument or cryptocurrencies you should be fully informed of the risks and costs associated with trading the financial markets, carefully consider your investment objectives, level of experience, and risk appetite, and seek professional advice where needed.
Fusion Media would like to remind you that the data contained in this website is not necessarily real-time nor accurate. The data and prices on the website are not necessarily provided by any market or exchange, but may be provided by market makers, and so prices may not be accurate and may differ from the actual price at any given market, meaning prices are indicative and not appropriate for trading purposes. Fusion Media and any provider of the data contained in this website will not accept liability for any loss or damage as a result of your trading, or your reliance on the information contained within this website.
It is prohibited to use, store, reproduce, display, modify, transmit or distribute the data contained in this website without the explicit prior written permission of Fusion Media and/or the data provider. All intellectual property rights are reserved by the providers and/or the exchange providing the data contained in this website.
Fusion Media may be compensated by the advertisers that appear on the website, based on your interaction with the advertisements or advertisers.
© 2007-2024 - Fusion Media Limited. All Rights Reserved.