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Mumbai - 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 cut to 6% from 6.25%, the Reserve Bank of India said in a statement in Mumbai on Wednesday. The move was predicted by 41 of 57 economists in a Bloomberg survey with the rest seeing no change.
Five of the six-member monetary policy committee voted for a cut with this seen as Governor Urjit Patel’s last chance through 2018 to spur growth before the US Federal Reserve reduces its balance sheet, forcing emerging markets to tighten. Pressure had been mounting for a stimulus as rising financial markets belie weak investment in Asia’s No. 3 economy.
"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."
Key points from the statement:
• Reiterates projection of April-September inflation at 2% to 3.5%, rising to 3.5% to 4.5% over the next six months.
• Retains forecast that gross value added will grow 7.3% 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," which depends largely on state governments doing their bit to speed up project.
• The yield on Indian government notes due May 2027 rose one basis point to 6.45%, according to prices from the RBI’s trading system.
• The rupee extended gains, rising 0.5% to 63.79 per dollar. The benchmark stock index fell.
"Further rate cuts will be data dependent," said Sujan Hajra, chief economist at Anand Rathi Financial Services in Mumbai. "If inflation continues to remain modest, another rate cut is possible by December end."
‘Paradigm shift’
The move follows comments from Modi’s top economic adviser Arvind Subramanian, who said last month that India was undergoing a "paradigm shift" in prices and urged policy makers to reflect "very, very, carefully" upon June’s record low inflation and soft industrial output.
Consumer prices rose 1.5% in June and will end 2017 around the RBI’s medium-term inflation target of 4%, according to the median estimate in a Bloomberg survey.
Private economists have also lowered their growth projections for the previous quarter as loan-growth hovers near a record low and job losses mount after Modi last year surprisingly scrapped 86% of currency in circulation.
Gross domestic product will grow 6.9% April to June instead of the 7% estimated earlier, the survey shows. Analysts had been wrong footed for the previous quarter when the economy expanded 6.1% rather than the 7.1% projected pace. While these seem to be robust rates of growth, they’re not enough to create jobs for the million Indians who enter the workforce each month.
‘Strongly pleaded’
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% 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.
State Bank of India, the country’s largest lender, on Monday lowered rates for most depositors and said it took the move to avoid raising lending rates.
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