The Reserve Bank of India has cut interest rates for the second time in two months
- At its first meeting of the financial year and the only meeting before general
elections, the RBI’s Monetary Policy Committee (MPC) slashed rates from 6.25% to 6%.
- The back-to-back rate cut - the first since the MPC was instituted in 2016 - was largely in line with market expectations, given the fact that
inflationis still subdued and banksare being slow to transmit lower rates.
- However, the RBI maintained its stance at “neutral”, indicating a slight uncertainty about monsoon and inflation forecasts in the latter half of the fiscal year.
At its first meeting of the financial year and the only meeting before general elections, the RBI’s Monetary Policy Committee (MPC) slashed rates from 6.25% to 6%. The six-member committee voted 4-2 in favour of the cut.
The back-to-back rate cut - the first since the MPC was instituted in 2016 - was largely in line with market expectations, given the fact that inflation is still subdued and banks are being slow to transmit lower rates.
A rate cut will boost lending growth as well as consumer and investor sentiment as India heads to the polls.
In fact, the Sensex reached record highs of 39,241 points on Wednesday on expectations of another rate cut.
However, the RBI maintained its stance at “neutral”, indicating a slight uncertainty about monsoon and inflation forecasts in the latter half of the fiscal year.
Inflation is still subdued, which in turn, also exerts a downward pull on economic growth.
Consumer price inflation rose to 2.57% in February 2019 as fuel and electricity prices as well as the cost of household items like vegetables and dairy products increased. Despite hitting a 19-month low of 1.97% the previous month, it is still well below the RBI’s 4% target.
India Ratings, a domestic ratings agency, expects inflation to stay subdued in the near term as households prioritise savings over consumption.
The data showed that the persistent decline in price growth has bottomed out due to a rebound in food and petrol prices.
However, despite the recent uptick, inflation is expected to stay below the RBI’s medium-term target for the rest of the year.
Tanvi Jain, of UBS Securities, told Reuters that headline core price inflation will be under 4% - the lower bound of the RBI’s target range - until October 2019 with an overall average of 3.8% for fiscal 2020.
At its previous meeting in early February 2019, right after the government presented its interim budget, the RBI cut rates to 6.25% from 6.5% in a bid to boost economic growth in the last quarter of the year. This was the central bank’s first rate cut in 18 months.
At the February meeting, the six-member monetary policy committee, led by RBI Governor
The latest MPC decision comes amid cautious projections of growth. India's Central Statistics Office lowered the estimated growth rate for 2018-19 to 7% from 7.4%. At a press conference following the rate decision today, the RBI said that it had lowered its growth forecast for 2019-2020 to 7.2% from an original estimate of 7.4%.
Yesterday, the Asian Development Bank also lowered its GDP growth forecast for India this year from 7.6% to 7.2% owing to a weaker-than-expected rise in investment growth.
Industrial production growth declined to a mere 1.7% in January 2019, compared to 7.5% a year ago, owing to weak capital goods spending by the government as well as sluggish electricity generation and mining output growth. It had recovered slightly the previous month from a 17-month low in November 2018.
In a bid to spur growth and boost investor confidence, the RBI has also given liquidity support to markets through a $5 billion currency swap - a move it is set to repeat later this month.
While the rate cut was received favourably by the market - the Sensex surged by over a 1000 points following the decision - some industry bodies felt that it wasn't enough given the slowdown in growth and inflation.
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