In­dia’s cen­tral bank cuts key rate by 25bps

Muscat Daily - - BUSINESS -

Mum­bai, In­dia - In­dia cut in­ter­est rates to the low­est since 2010 to boost an econ­omy strug­gling to re­cover from Prime Min­is­ter Naren­dra Modi’s cash clam­p­down.

The bench­mark re­pur­chase rate was low­ered by 25 ba­sis points (bps) to six per cent from 6.25 per cent, the Re­serve Bank of In­dia (RBI) said in a state­ment on Wed­nes­day. It re­tained its neu­tral pol­icy stance.

Five of the six-mem­ber mone­tary pol­icy com­mit­tee (MPC) voted for a cut and called on the gov­ern­ment to speed up projects as there’s an ‘ ur­gent need’ to boost pri­vate in­vest­ment. The re­duc­tion may be RBI gov­er­nor Ur­jit Pa­tel’s last chance to spur growth be­fore the US Fed­eral Re­serve be­gins re­duc­ing its bal­ance sheet, adding pres­sure on emerg­ing mar­kets to tighten. ‘Some of the up­side risks to in­fla­tion have ei­ther re­duced or not ma­te­ri­alised’, the cen­tral bank said. ‘Con­se­quently, some space has opened up for mone­tary pol­icy ac­com­mo­da­tion, given the dy­nam­ics of the out­put gap’.

In its pol­icy state­ment the RBI re­it­er­ated pro­jec­tion of AprilSeptem­ber in­fla­tion at two per cent to 3.5 per cent, ris­ing to 3.5 per cent to 4.5 per cent over the next six months. It re­tained fore­cast that gross value added will grow 7.3 per cent in the year through March.

‘While in­fla­tion has fallen to a his­toric low, a con­clu­sive seg­re­ga­tion of tran­si­tory and struc­tural fac­tors driv­ing the dis­in­fla­tion is still elu­sive. There is an ur­gent need to rein­vig­o­rate pri­vate in­vest­ment’, RBI said.

Con­sumer prices rose 1.5 per cent in June and will end 2017 around the RBI’s medium-term in­fla­tion tar­get of four per cent, ac­cord­ing to the me­dian es­ti­mate in a Bloomberg sur­vey.

So far the risks of job­less growth have been pa­pered over by stronger fi­nan­cial mar­kets, with In­dia’s stocks, bonds and ru­pee among the world’s best per­form­ers this year.

How­ever credit growth con­tin­ues to hover near record lows, In­dian fac­to­ries are run­ning at less than 73 per cent of their ca­pac­ity and bad loans at In­dian banks are fore­cast to rise from a 15-year high.

Against this back­drop, one mem­ber of the MPC panel - Ravin­dra Dho­lakia - dis­sented for the first time at the pre­vi­ous meet­ing and ‘strongly pleaded’ for a re­duc­tion in bor­row­ing costs. He again called for a 50 ba­sis point cut at the Au­gust meet­ing.

At a brief­ing af­ter the RBI de­ci­sion, Pa­tel said liq­uid­ity in the bank­ing sys­tem and pol­icy rate re­duc­tions by the cen­tral bank give com­mer­cial lenders scope to lower lend­ing rates.

His deputy Vi­ral Acharya said the RBI is ‘com­fort­able’ with its real rate that around 1.75 per cent.

“We are look­ing at real rates as one of the driv­ers in de­ci­sion mak­ing, not the sole com­po­nent,” Acharya said. “And it’s best to look at real rate more when you think things are steady rather than when things have gone through a fair bit of un­cer­tainty as we have over the last year.”

State Bank of In­dia (SBI), the coun­try’s largest lender, on Mon­day low­ered rates for most de­pos­i­tors and said it took the move to avoid rais­ing lend­ing rates. SBI at­trib­uted the cut in de­posit rates to ris­ing real rates, which are fund­ing costs ad­justed for in­fla­tion.

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