India's central bank cuts interest rate with more easing seen

Thursday's cut reverses the 50 basis points of increases delivered by the Reserve Bank of India last year
India's central bank cuts interest rate with more easing seen
The growth slowdown is a setback for Prime Minister Narendra Modi, who came to power in 2014 on the back of pledges to reform the economy and create 10 million jobs each year. Modi is seeking a second term in office in elections starting April 11.
By Bloomberg
Thu 04 Apr 2019 11:55 AM

India’s central bank delivered a back-to-back interest rate cut on Thursday and fuelled speculation of more policy easing after lowering inflation and economic growth forecasts.

The repurchase rate was reduced by 25 basis points to 6 percent, a decision predicted by all but two of the 47 economists surveyed by Bloomberg News. Four of the six-member Monetary Policy Committee voted in favour of the rate move, with five voting to keep the neutral policy stance.

“The domestic economy is facing headwinds, especially on the global front,” the central bank said in a statement in Mumbai on Thursday. “The need is to strengthen domestic growth impulses by spurring private investment which has remained sluggish.”

The rupee, which has gained 0.9 percent so far this year after being Asia’s worst performing major currency last year, was little changed at 68.82 per dollar as of 12:40 p.m. in Mumbai. Bonds reversed early gains after traders perceived the policy as less dovish than expected. The yield on the benchmark 10-year bond was up 4 basis points to 7.31 percent.

The RBI cut its inflation forecast for this year, seeing it in a range of 2.9 percent to 3 percent in the April-September period, compared with a February projection of 3.2 percent to 3.4 percent. It also sees lower economic growth of 7.2 percent for the year that began on April 1, down from 7.4 percent previously, amid signs of weakening domestic investment activity and waning global demand.

Output Gap

While inflation picked up to 2.6 percent in February, it remains well below the RBI’s medium-term target of 4 percent. That’s given Governor  Shaktikanta Das room to support economic growth after it hit a six-quarter low in the three months ended December.

“The output gap remains negative and therefore, strengthening domestic growth impulses by spurring private investments assumes priority,” Das told reporters in Mumbai.

Thursday’s cut reverses the 50 basis points of increases delivered by the Reserve Bank of India last year. It also marks the most  aggressive easing by any major emerging market central bank in 2019 amid a slowdown in inflation and the U.S. Federal Reserve’s shift to a more dovish policy stance.

The downgrade in the inflation forecast “leaves room for some more rate cuts going ahead,” said Siddhartha Sanyal, chief India economist at Barclays Plc in Mumbai. “At this point, the MPC is taking greater cognizance of the growth scenario.”

After today’s rate cut, India’s real interest rate drops below Malaysia and Indonesia. High real rates have been cited as a possible obstacle to faster investment growth and is one of the reasons the government has been pushing for easier financial conditions.

Policy Risk

The growth slowdown is a setback for Prime Minister Narendra Modi, who came to power in 2014 on the back of pledges to reform the economy and create 10 million jobs each year. Modi is seeking a second term in office in elections starting April 11.

Uncertainty about the poll outcome has fuelled worries about policy continuity in Asia’s third-largest economy, with businesses curbing investments in an environment of mounting global risks and sluggish domestic demand.

With banks yet to fully pass on the previous cut partly due to tight money conditions, the RBI said it will continue to add liquidity to ease constraints in the banking system. Das said he will use all instruments available to him including open-market bond purchases and currency swap, but these depend on the evolving situation.

Aurodeep Nandi, an economist at Nomura Plc in Mumbai, said he has a more bearish outlook on economic growth of 6.8 percent in the current fiscal year. “Contained inflation amid growth disappointment will open up space for further policy easing,” with another 25 basis-point cut expected, most likely in June, he said.

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