In­dia CB cuts rates By 25 ba­sis points

Kuwait Times - - BUSINESS -

In­dia’s cen­tral bank yes­ter­day cut in­ter­est rates for the first time in al­most a year amid slug­gish growth and record-low in­fla­tion in the world’s fastest grow­ing econ­omy. The Re­serve Bank of In­dia an­nounced the bench­mark repo rate-the level at which it lends to com­mer­cial banks-would be cut by 25 ba­sis points to 6 per­cent, a near seven-year low. The in­ter­est rate last sat at 6 per­cent in Septem­ber 2010.

The cut-the first since last Oc­to­ber­was pre­dicted by 41 of 57 econ­o­mists polled by Bloomberg News, with the rest an­tic­i­pat­ing no change. Fi­nance Min­is­ter Arun Jaitley called for a re­duc­tion in the key pol­icy rate in June af­ter re­tail in­fla­tion fell sharply from 2.18 per­cent to 1.54 per­cent the low­est since the gov­ern­ment started track­ing it in its cur­rent form in 2012. New Delhi has kept an in­fla­tion tar­get of 4 per­cent, with room for a 2 per­cent in­crease or de­crease. The June data was the first time the lower end of that band has been breached, ex­perts said. Rates are set by a six-mem­ber com­mit­tee at the cen­tral bank.

RBI gov­er­nor Uri­jit Pa­tel said four voted for a cut of 25 ba­sis points, while one pushed for dou­ble that and an­other for rates to re­main un­changed. Pa­tel said low in­fla­tion and the suc­cess­ful roll­out of the na­tional Goods and Ser­vices Tax on July 1 helped steer the de­ci­sion. “Th­ese fac­tors... opened up some space for mon­e­tary pol­icy ac­com­mo­da­tion,” he told re­porters.

The bank’s pre­vi­ous de­ci­sion to cut rates came a month be­fore Prime Min­is­ter Naren­dra Modi re­moved all large-de­nom­i­na­tion ban­knotes from cir­cu­la­tion, in a shock move to tackle cor­rup­tion and tax eva­sion. The con­tro­ver­sial pol­icy was blamed for putting the brakes on In­dia’s eco­nomic ex­pan­sion.

Growth slowed in the fourth quar­ter end­ing in March to 6.1 per­cent, but the gov­ern­ment de­fended the pain as nec­es­sary to clean up cor­rup­tion rife through­out the econ­omy. Ex­perts have pre­dicted fur­ther dis­rup­tion to the econ­omy as busi­nesses ad­just to the Goods and Ser­vices Tax. While most econ­o­mists ex­pected the cut, not all thought it would be use­ful. “There’s been a 175 bps (ba­sis points) cut since Jan­uary 2015 up till the last mon­e­tary pol­icy (meet­ing). If that hasn’t made any dif­fer­ence to in­vest­ment and credit off-take, how will this 25 bps cut do any­thing?” said Su­nil Sinha, prin­ci­pal econ­o­mist at In­dia Rat­ings & Re­search. “There are big­ger prob­lems in the econ­omy. If there is no de­mand or over­ca­pac­ity, 25 bps cut won’t make any dif­fer­ence.” Madan Sabnavis, chief econ­o­mist at CARE Rat­ings, had ex­pected the key in­ter­est rate to re­main un­changed.

“I was fairly sur­prised by the cut,” he told AFP. “The fun­da­men­tal prob­lem is of de­mand. In­dus­try won’t in­vest just be­cause there’s been a 25 bps cut.”

The gov­ern­ment wel­comed the move and called it “an im­por­tant step nec­es­sary to con­verge to­ward the ap­pro­pri­ate real mon­e­tary con­di­tions for sus­tained growth con­sis­tent with In­dia’s po­ten­tial and for sta­ble, mod­er­ate in­fla­tion”.

MUMBAI: An Indian po­lice­man walks through the Re­serve Bank of In­dia (RBI) head of­fice in Mumbai yes­ter­day. —AFP

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