The Reserve Bank of India is keeping the country's key policy rate unchanged at 8%, but is reducing the mandatory amount of bonds lenders must park at the RBI by 50 basis points to 22.5% of deposits, starting in mid-June - AFP Photo.
MUMBAI: India’s central bank cut its benchmark interest rate for a third straight time and paved the way for more policy easing to support an economy growing at the slowest pace since 2014.
The repurchase rate was reduced by 25 basis points to 5.75%, the lowest in nine years, as predicted by 31 of 43 economists surveyed by Bloomberg News. The six-member Monetary Policy Committee voted unanimously for a rate cut and switched its stance to “accommodative” from neutral.
“Growth impulses have weakened significantly,’’ the central bank said in a statement Thursday as it lowered its growth forecast for the current fiscal year to 7% from April’s projection of 7.2%.
With inflation below the central bank’s medium-term target, “there is scope for the MPC to accommodate growth concerns by supporting efforts to boost aggregate demand.”
The rate cut offers the support Prime Minister Narendra Modi needs to boost economic growth by reviving domestic consumption and investments as he starts his second term in office. The easing is in line with global monetary policy turning looser as the Federal Reserve shifts to a more dovish stance.
“A sharp slowdown in investment activity along with a continuing moderation in private consumption growth is a matter of concern,” the central bank said.
India’s 10-year bond yields fell 11 basis points after the decision, while interest-rate swaps declined.
More easing
Latest high-frequency indicators from auto sales to air travel show consumer demand is waning in India, amid a crisis in the shadow banking sector that’s curbed lending. Any shortfall in the monsoon, which waters more than half of India’s farmland between June and September, is an added risk to growth.
“The change in stance and downgrading of growth forecasts suggest they are leaving the door open for further loosening,” said Shilan Shah, India economist at Capital Economics in Singapore. “I wouldn’t be surprised to see a further one or two cuts in the next six months.”
While Modi has limited headroom for fiscal stimulus, subdued inflation -- at 2.9% in April -- allowed monetary policy makers space to bolster the economy. Gross domestic product growth slowed to a five-year low of 5.8% in the three months to March.
The RBI revised its inflation forecast for April-September to a range of 3-3.1%, up from 2.9-3% seen in April, citing a broad-based pickup in food prices. That’s still lower than the 4% medium-term inflation target of the central bank.
“There’s a risk that spare capacity is still tight and a further few rate cuts could lead to a rebound in inflation and higher inflation in the long-term,” said Shah. “This looks like it will turn into a fairly aggressive easing cycle.” - Bloomberg
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