NEW DELHI – High inflation prevented India’s central bank from cuttingrates for a sixth time Thursday, while it slashed its annual growthforecast as the government struggles to jumpstart the economy.
The news will deal a blow to Prime Minister Narendra Modi, who is comingunder pressure seven months into his second term to tackle unemployment,which is sitting at a four-decade high.
The Reserve Bank of India (RBI) said the benchmark repo rate — the levelat which it lends to commercial banks — would remain unchanged at 5.15percent, a nine-year low.
But it said it expected the economy to expand five percent in the yearthrough March, from its previous forecast of 6.1 percent, as consumerdemand and manufacturing activity contracts.
India’s economy grew 4.5 percent in July-September, its slowest pace since2013 and well off the 7.0 percent enjoyed a year ago, according togovernment data.
That is well below the level needed to provide the millions of jobs soughtby new entrants to the labour market every year, posing a major headachefor Modi.
Economists surveyed by Bloomberg News had largely predicted the centralbank would cut interest rates by 40-50 basis points to spark a recoveryafter a dismal year.
But a sudden spike in retail inflation to 4.62 percent — beyond thecentral bank’s target of four percent — encouraged the RBI to hit pause onfurther reductions as the government struggles to kickstart what was oncethe world’s fastest growing major economy.
RBI governor Shaktikanta Das told reporters inflation was likely to remainhigh through March 2020 as he explained his decision.
“We should allow some time to see the impact of government measures and theRBI’s (previous) rate cuts so we decided to wait and take a temporarypause,” he said.
– No benefit to consumers –
Finance Minister Nirmala Sitharaman has announced a slew of reformsincluding easing restrictions on foreign investment in key sectors,slashing corporate taxes, and launching a privatisation drive aimed atreviving moribund state firms.
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But the measures have failed to raise confidence. Demand for everythingfrom cereals to cars has plummeted while unemployment is at 8.5 percent,its highest since the 1970s.
Das — a Modi ally — has cut interest rates five times in a row startingin February 2019, bringing them down by 135 basis points.
But debt-ridden banks have not reduced their lending rates, and so failedto pass on the benefits to consumers.
“Against the backdrop of growth slowdown, the RBI’s rate cutting has notmade any major difference,” said Garima Kapoor, economist at Elara Capital.
The “RBI has to ensure its massive rate-cutting cycle leads to lower ratesfor consumers”, she told AFP.
The lack of credit, coming after the collapse of India’s shadow bankingsector, has exacerbated the crisis, analysts say.
Public finances are also in a mess, with several state and union territoryrepresentatives calling for the government to release funds owed to themfrom a nationwide tax rolled out in July 2017.
The central government has not paid out some states’ share of taxes sinceAugust, local media reported Wednesday.
The Organization for Economic Cooperation and Development (OECD) forecast amodest recovery for India Thursday, predicting annual growth of 6.2 percentin 2020, but warned further reforms were needed.
OECD chief economist Laurence Boone urged New Delhi to “continue loweringbarriers to trade to generate the investment and jobs India needs to raiseliving standards across the country”. -APP/AFP
