India’s central bank cuts key rate by 25bps
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.