The Reserve Bank of India offices
The Reserve Bank of India office in Mumbai. Image Credit: Bloomberg

Mumbai (Bloomberg): India’s central bank cut its benchmark interest rate for a third straight time and paved the way for more policy easing to support an economy growing at the slowest pace since 2014.

The repurchase rate was reduced by 25 basis points to 5.75 per cent - the lowest in nine years. The six-member Monetary Policy Committee voted unanimously for a rate cut and switched its stance to “accommodative” from neutral.

“Growth impulses have weakened significantly,” the central bank said in a statement as it lowered its growth forecast for the current fiscal year to 7 per cent from April’s projection of 7.2 per cent. With inflation below the central bank’s medium-term target, “there is scope for the MPC to accommodate growth concerns by supporting efforts to boost aggregate demand.”


India’s inflation in April, allowing for monetary easing

The rate cut offers the support Prime Minister Narendra Modi needs to boost economic growth by reviving domestic consumption and investments as he starts his second term in office. The easing is in line with global monetary policy turning looser as the Federal Reserve shifts to a more dovish stance.

“A sharp slowdown in investment activity along with a continuing moderation in private consumption growth is a matter of concern,” the central bank said. India’s 10-year bond yields fell 11 basis points after the decision, while interest-rate swaps declined.

More Easing

While Modi has limited headroom for fiscal stimulus, subdued inflation - at 2.9 per cent in April - allowed monetary policy makers space to bolster the economy. Gross domestic product growth slowed to a five-year low of 5.8 per cent in the three months to March.

The RBI revised its inflation forecast for April-September to a range of 3-3.1 per cent, up from 2.9-3 per cent seen in April, citing a broad-based pickup in food prices. That’s still lower than the 4 per cent medium-term inflation target of the central bank.

Rate cut couls also jump start consumer buying
Latest high-frequency indicators from auto sales to air travel show consumer demand is waning in India, amid a crisis in the shadow banking sector that’s curbed lending. Any shortfall in the monsoon is an added risk to growth.
“The change in stance and downgrading of growth forecasts suggest they are leaving the door open for further loosening,” said Shilan Shah, India economist at Capital Economics. “I wouldn’t be surprised to see a further one or two cuts in the next six months.”