In­dia cen­tral bank on course to cut rates af­ter growth slump

Muscat Daily - - BUSINESS -

Mumbai, In­dia - In­dia’s deep­en­ing eco­nomic slow­down gives the cen­tral bank more rea­son to cut in­ter­est rates this week, ad­ding to the fis­cal stim­u­lus al­ready in the works.

The Re­serve Bank of In­dia (RBI) will de­liver its rate de­ci­sion on December 5, days af­ter a report showed growth col­lapsed to 4.5 per cent in the July-Septem­ber quar­ter, the first time it’s been be­low 5 per cent since 2013.

Led by gov­er­nor Shak­tikanta Das, the RBI has al­ready cut in­ter­est rates by 135 ba­sis points in five moves this year, the most by any Asian cen­tral bank. Pol­icy mak­ers have had their fo­cus squarely on boost­ing Asia’s third-largest econ­omy, and last week’s weak data gives them added rea­son to con­tinue push­ing for growth.

“The weak num­bers em­phat­i­cally un­der­score the need of pol­icy fo­cus on growth,” said Shub­hada Rao, chief econ­o­mist at Yes Bank Ltd in Mumbai. “We are ex­pect­ing the RBI to ex­e­cute an­other rate cut of 25 ba­sis points at its next meet­ing.”

Last quar­ter’s growth slump showed a con­trac­tion in man­u­fac­tur­ing and sub­dued in­vest­ments. It was only gov­ern­ment spend­ing that bol­stered the econ­omy, with pri­vate con­sump­tion still fairly low key. Sov­er­eign bonds were broadly un­changed on Mon­day, while the ru­pee was steady against the dol­lar.

A slew of high-fre­quency in­di­ca­tors sug­gest the slow­down ex­tended into Oc­to­ber. The cen­tral bank may be pushed to lower its growth forecast for the fis­cal year through March 2020 from 6.1 per cent, with econ­o­mists in a Bloomberg sur­vey al­ready pre­dict­ing ex­pan­sion of just 5.6 per cent.

“We ex­pect the cen­tral bank to take note of the down­ward sur­prises in the data ver­sus fore­casts and ac­knowl­edge a deeper-than-ex­pected slow­down in eco­nomic ac­tiv­ity,” said Rahul Ba­jo­ria, a se­nior econ­o­mist at Bar­clays Plc in Mumbai.

In the in­ter­est-rate swap mar­ket, in­vestors are bet­ting the re­pur­chase rate - which is cur­rently at 5.15 per cent - will be 5 per cent in the next 12 months, while econ­o­mists are fore­cast­ing it at 4.75 per cent by the end of March as growth re­mains sub­dued.

De­spite the mone­tary stim­u­lus and a slew of gov­ern­ment mea­sures to boost the econ­omy - in­clud­ing a US$20bn tax bo­nanza to com­pa­nies - a re­cov­ery looks un­cer­tain.

Ru­pal Agar­wal, Asia quan­ti­ta­tive strate­gist at San­ford C Bern­stein in Mumbai, told Bloomberg Tele­vi­sion that the com­pos­ite lead­ing in­di­ca­tor that she tracks has been in­di­cat­ing a ‘re­ces­sion for In­dia for the last four months’.

Busi­nesses have cut back on in­vest­ments, pre­fer­ring to re­pay loans in­stead, while con­sumers have curbed spend­ing, fear­ing more job losses. The ru­ral econ­omy re­mains weak and bor­row­ing is ham­strung by debt-laden banks and a cri­sis-rid­den shadow lend­ing sec­tor.

Banks also haven’t passed on all of the 135 ba­sis points of cen­tral bank rate cuts to bor­row­ers, leav­ing pol­icy mak­ers frus­trated.

Mone­tary pol­icy space is slowly clos­ing as in­fla­tion starts to ac­cel­er­ate. Con­sumer prices rose 4.62 per cent in Oc­to­ber from a year ear­lier, the first read­ing above 4 per cent - the RBI’s medium-term tar­get - since July 2018, and the high­est since June last year.

The spike was driven by a surge in onion prices, although core in­fla­tion - which strips out volatile food and fuel prices - slowed to 3.4 per cent.

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