NEW DELHI – India’s central bank on Wednesday cut interest rates for thefourth time this year and slashed growth forecasts as New Delhi battles asluggish economy and high unemployment.
The Reserve Bank of India (RBI) said the benchmark repo rate — the levelat which it lends to commercial banks — would be reduced by 35 basispoints to 5.40 percent, taking rates to their lowest level since 2010.
“The monetary policy committee was of the view that a 25 basis point ratecut was inadequate due to evolving global economic conditions while a 50basis point cut would be excessive,” RBI governor Shaktikanta Das toldreporters.
“Hence, 35 basis points was viewed as a balanced level of cut due to thecurrent circumstances.”
All 36 economists surveyed by Bloomberg News had predicted the central bankwould cut rates by 25 basis points.
The Reserve Bank also revised down its growth projection for 2019-20 from7.0 percent to 6.9 percent, noting that the global economy has been losingpace.
“Domestic economic activity continues to be weak, with the global slowdownand escalating trade tensions posing downside risks,” it added in astatement.
A fall in domestic demand lowered India’s growth rate in the last quarterto 5.8 percent, with unemployment at its highest since the 1970s.
Indian carmakers including Mahindra & Mahindra have halted production andreported falling sales as consumer demand fell throughout 2019.
The cut to borrowing costs comes as central banks around the world adopt amore dovish tone on monetary policy amid the global slowdown.
– Challenges ahead –
This is the fourth reduction this year under governor Shaktikanta Das, anally of Prime Minister Narendra Modi who was appointed in December afterhis predecessor quit following a spat with the government over allegedinterference.
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Modi — who won a second landslide victory in recent national elections –faces a massive challenge to create enough jobs for the 1.2 million Indianswho join the labour market each month.
The new government that took charge in May faced twin blows when datashowed economic expansion falling to a five-year-low and risingunemployment.
The growth figures had come in at 5.8 percent in the fourth quarter. Itmeant India had lost its place as the world’s fastest-growing major economyto China, which is currently on a 6.4 percent-growth trajectory.
Meanwhile, Finance Minister Nirmala Sitharaman’s budget announcements inJuly created panic with a new tax proposal for the super-rich that alsotargeted trusts used by a large number of foreign funds.
Economists said further cuts could be on the cards.
“RBI has moved its stance to accommodative and inflation is under control.RBI will cut interest rates by 50 basis points incrementally throughout2019 after this rate cut,” Elara Capital economist Garima Kapoor told AFP.
India’s inflation rose to an eight-month high of 3.18 percent in June butwas within the RBI’s target of four percent.
Capital Economics’ Shilan Shah warned further policy loosening could be amisstep, and “lead to higher inflation and interest rates in the future”.
“The extent of the slowdown is open to debate. Soft surveys show that sparecapacity remains limited, while bank lending growth is close to a five-yearhigh,” Shah said.-APP/AFP
