A marked slowdown in Asia’s third-largest economy pushed growth concerns to the top of the Reserve Bank of India’s agenda, suggesting more policy easing will follow its third interest-rate cut of the year. Governor Shaktikanta Das and the inflation-targeting RBI he leads is now squarely focused on boosting investment and consumption after quarterly growth cooled to a five-year low at the beginning of 2019. A benign inflation outlook and a dovish turn by the U.S. Federal Reserve strengthened the case for policy makers to switch to an “accommodative” stance on Thursday, indicating further easing ahead.
The RBI was the first of the world’s major central banks to cut interest rates this year as Das identified early on the growth risks facing the economy. Since then Australia, New Zealand, Malaysia and others have followed as policy makers seek to shore up their economies against a worsening U.S.-China trade war. Even the Fed is being pressured to ease, while European Central Bank President Mario Draghi said Thursday policy makers are “determined” to act if needed to support the euro zone’s economy.
Key details from the RBI statement Benchmark repurchase rate cut to 5.75% from 6% GDP growth forecast for fiscal year 2020 cut to 7% from 7.2% CPI forecast for first half of fiscal year revised to a range of 3-3.1% from 2.9-3%
“Clearly the slowdown has put growth in the forefront of the RBI’s thinking,” said Priyanka Kishore, head of India and Southeast Asia economics at Oxford Economics Ltd. in Singapore “The dovish shift signals that the RBI is not done yet. The conditions for another 25 basis-point cut this year have ripened amid falling global oil prices and lower external financing pressures.”
While inflation has stayed below the 4% midpoint of the central bank’s inflation target for nine months, economic growth has lost momentum, slowing for a fourth straight quarter to 5.8% in the three months to March. The central bank Thursday lowered its growth projections made in April, and now expects the economy to expand 7% in the fiscal year to March, down from an earlier projection of 7.2%.
“Our decision is driven by growth concerns and inflation concerns, in that order,” Das told reporters in Mumbai after the policy decision. “The MPC mandate targets a certain level of inflation, keeping in mind growth.”
What Bloomberg’s economists say
“A growth recovery requires much lower real interest rates. The key to that is sufficient liquidity in the banking system to aid downward transmission of RBI’s policy rate cuts.”– Abhishek Gupta, India economistClick here to read the full report
With little room in the budget to provide a fiscal stimulus, the government has been increasingly turning to the central bank for support. And the rate cut is what Prime Minister Narendra Modi needs to revive domestic consumption and investments as he starts his second term in office.
“When we have very little room on the fiscal side, which is already on the higher end, slightly more accommodative monetary policy can support growth, especially when inflation risks are contained,” said Anubhuti Sahay, head of South Asia economic research at Standard Chartered Plc in Mumbai. “The market will be hoping for more rate cuts going forward.”
The change in policy stance, along with the rate cuts, are likely to see faster transmission to bank lending rates, analysts said. Of the 50 basis points of easing in the first two rate moves this year, only 21 basis points was passed on to new borrowers, according to the central bank.
“Transmission of the rate cuts will be key and the RBI should aim to maintain the liquidity, at least, at neutral over the next few months,” said Suvodeep Rakshit, a senior economist at Kotak Institutional Equities Ltd. in Mumbai.