Here’s why India’s central bank could cut interest rates again this week

• After cutting rates from 6.5% to 6.25% at its last meeting in February - in a bid to spur economic growth in the last quarter of the year - it seems that the central bank is all set to lower interest rates by 25 basis points again.
  
• Inflation is still subdued, which in turn, can keep a lid on economic growth. Meanwhile, industrial production and rural demand have been especially sluggish.
  
• Another rate cut will spur investment and credit growth, especially for consumer loans and businesses’ working capital needs. It will also further reduce bond yields.
  

The Reserve Bank of India’s (RBI) upcoming monetary policy meeting on April 4th is important for two reasons. It’s the first meeting of the financial year and it’s taking place a week before the first phase of polling in India’s general elections begins.

After cutting rates from 6.5% to 6.25% at its last meeting in February - in a bid to spur economic growth in the last quarter of the year - it seems that the central bank is all set to lower interest rates by 25 basis points again. At least, the market seems to be betting on it. Benchmark index, Sensex, touched a record high of 39,017 points this morning on expectations of a rate cut.

In a report by the State Bank of India (SBI), the bank’s chief economic advisor, Soumya Kanti Ghosh, said that rural and urban demand continued to be weak, translating into a drag on the economy. Ghsh actually felt that a rate cut of more than 25 basis points might be in order.

At the February meeting, the six-member monetary policy committee, led by RBI Governor Shaktikanta Das, changed the bank’s policy stance from “calibrated tightening” to “neutral”, indicating a higher probability of a few more rate cuts this calendar year.

The reason? Inflation is still subdued, which in turn, can keep a lid on economic growth. Despite the fact that consumer price inflation rose to 2.57% in February 2019 after hitting a 19-month low of 1.97% the previous month, it is still well below the RBI’s 4% target.

Inflation is expected to stay benign in the near term, according to India Ratings, and households will prioritise savings over consumption.

Meanwhile, industrial production has been sluggish, with output growth fell to 1.7% in January 2019 from 2.6% the previous month.

Another rate cut will spur investment and credit growth, especially for consumer loans and businesses’ working capital needs. It will also further reduce bond yields, prolonging a rally in bond markets, driven by a surge in foreign portfolio investment inflows owing to confidence that the Modi administration will secure a second term.

A rise in value of government bonds helps in keeping the borrowing costs lower.

Bryan Carter, of BNP Paribas Asset Management, highlighted market expectations for a continued softening of rates. He told Business Standard, “India has already fired the first easing shot, so the expectation is naturally for more.”


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