MUMBAI: India’s central bank aggressively cut interest rates on Tuesday in a bid to kickstart economic growth, following a sharp drop in inflation.
Such a move is designed to lower the barriers to borrowing and investing, providing a boost to consumers and the economy.
The Reserve Bank of India (RBI) surprised analysts by lowering the benchmark repo rate—the level at which it lends to commercial banks—to 6.75 percent from 7.25 percent with immediate effect.
Economists had been expecting a cautious 25-basis-point cut and the 50-basis-point reduction was certain to please Prime Minister Narendra Modi’s business-friendly government.
But the repo rate is still much higher than that in other major economies, with the US and Japan on record lows of near zero percent.
“In India, a tentative economic recovery is under way, but is still far from robust,” RBI Governor Raghuram Rajan wrote in the bank’s monetary policy review.
“Investment is likely to respond more strongly [and boost domestic demand]if there is more certainty about the extent of monetary stimulus in the pipeline, even if transmission is slow.
“Therefore, the Reserve Bank has front-loaded policy action by a reduction in the policy rate by 50 basis points,” he added.
Tuesday’s announcement marked the fourth time this year that the RBI has cut rates, raising to 125 the number of basis points that the bank has lopped off borrowing rates in 2015.
Rajan kept rates on hold last month and pressure had been growing on him to announce a further reduction as the Indian government seeks to quicken the pace of growth in Asia’s third-largest economy.
“It was surprise announcement, but timely. I don’t think the pressure from the government influenced Rajan,” Arun Singh, a senior economist at Dun & Bradstreet, told Agence France-Presse.
“The RBI has done it’s job, now it’s up to the banks to pass on these rate cuts. The ball is in their court.”
Global slowdown limits growth
Modi swept to power in May 2014 on a pledge to reform and revive the economy to help provide jobs for India’s tens of millions of young people.
After a promising start, India’s economic growth slowed to 7 percent in the first quarter of the current financial year, matching China and outpacing most major economies, but down from 7.5 percent in the previous quarter.
Rajan said projected growth for 2015-16 was “marked down slightly to 7.4 percent from 7.6 percent earlier.”
He blamed a slowdown in global growth and trade, a “continuing lack of appetite for new investment in the private sector,” and “the constraint imposed by stressed assets on bank lending and waning business confidence.”
The governor has made controlling inflation a priority during his tenure and with retail inflation easing to 3.66 percent in August against 7.03 percent last year, he said the time was right for a further cut.
“Since our last review, the bulk of our conditions for further accommodation have been met. The January 2016 target of 6-percent inflation is likely to be achieved,” he said.
The RBI announced its first monetary easing in 20 months in January, snipping 25 basis points off the repo rate.
It then made a surprise repeat cut in March before keeping the rate unchanged in April, citing inflation concerns and a failure of most commercial banks to implement reduced loan rates.
Rajan sliced the rate again in June before leaving it unchanged in August, remaining cautious before the inflationary effects of the summer monsoon could be determined. AFP