India cuts interest rate to lowest level in 9 years

India cuts interest rate to lowest level in 9 years

India’s central bank has cut its benchmark interest rate for the third time this year as it seeks to reverse the country’s sharp economic slowdown and also signalled the possibility of further easing. The Reserve Bank of India’s monetary policy committee voted unanimously to lower the benchmark repo rate by 25 basis points to 5.75 per cent, bringing it to its lowest level since late 2010.

The rate cut comes just days after Narendra Modi was sworn-in as prime minister for a second term after a landslide re-election victory that affirmed his strong personal popularity, despite his inability to deliver on the faster economic growth job creation he had promised in his 2014 election campaign.

Government data released last week confirmed that India’s GDP grew at its slowest pace for five years, expanding 6.8 per cent for the full year ending March 30 compared to 7.2 per cent the previous year. Industry groups argue India needs near double-digit growth to create enough jobs for the country’s young, aspirational population.

On Thursday, the RBI also lowered its GDP growth forecast for the current April-to-March financial year to 7 per cent, down from its previous forecast of 7.2 per cent, with bellwether indicators, such as car sales, pointing to continuing weakness in April and May.

Shaktikanta Das, who was appointed RBI governor late last year, said the current economic conditions compelled the committee to “act decisively and act in time”.

“Growth impulses have significantly weakened,” added Mr Das, whose predecessor was accused of maintaining overly tight monetary policy despite evidence of a slowdown.

The RBI has also shifted its monetary policy stance from neutral to accommodative, which Mr Das said was intended to rule out any near-term rate increase, and signal the possibility of future easing if growth remained soft.

The RBI cited concerns about slowing global economic momentum, against the backdrop of sharply rising tensions between the US and China, and sharply decelerating domestic growth.

But analysts warned that the RBI’s latest move might not provide the stimulus that the economy needs, given the woes of a banking system that had prevented lenders from passing on the benefits of cuts to borrowers.

According to India Research & Ratings, a credit-rating agency, the fall in household savings has prompted some commercial banks to raise their rates despite policy rate cuts.

“More than the rate cut, it is the transmission of the rate cut into the economy that has emerged as the bigger challenge,” it wrote in a note just ahead of the RBI’s announcement

Complicating matters, India’s government has sought to finance its own mounting borrowings through more aggressive promotion of its own sovereign savings schemes, the National Small Savings Fund, which is offered through the post office.

But bankers say the scheme offers savers interest rates of 8-8.5 per cent, which has made it even tougher for commercial banks to attract deposits at lower interest rates.

“If we want to reduce the cost of money, the question is how do we reduce deposit costs to make lending costs lower,” said Uday Kotak, chief executive of Kotak Mahindra Bank.

Persistently high deposit and lending rates highlights India’s lack of progress in paring its consolidated fiscal deficit, which remains roughly at the same levels of five years ago. While New Delhi has pared its central government deficit, state-level deficits have risen, as have off-balance sheet borrowings.

“The fiscal deficit is an important number, and we need to ensure we have a reasonable handle on it,” says Mr Kotak. es un sitio web oficial del Gobierno Argentino