India’s central bank cuts interest rate for third straight time amid growth worries

07, Jun. 2019

The Reserve Bank of India’s accommodative stance signals its concern about global and domestic growth. (Photo by Press Trust of India)
The Reserve Bank of India’s accommodative stance signals its concern about global and domestic growth. (Photo by Press Trust of India)

NEW DELHI, NNA - India’s central bank cut interest rates on Thursday at a third straight meeting, as widely expected, days after data showed a sharp domestic economic slowdown.

The Reserve Bank of India changed its policy stance from neutral to “accommodative” and revised down its domestic growth forecast for the current fiscal year ending next March.

“A sharp slowdown in investment activity along with a continuing moderation in private consumption growth is a matter of concern,” the bank said in a statement.

Key points:

―― The RBI board unanimously decided to cut the repo rate from 6 percent to 5.75 percent, the lowest since September 2010, following two 25-bps cuts at its previous meetings in April and February.

―― The bank’s accommodative stance signals its concern about the country’s economic slowdown, which saw GDP growth falling to a five-year low of 5.8 percent year on year in the Jan-March quarter.

―― The RBI lowered its domestic growth projection for the fiscal year ending next March to 7 percent from 7.2 percent forecast in April.

―― Risks to the bank’s main scenario include weather patterns, unseasonal spikes in vegetable prices, global fuel prices and the impact passed on to domestic prices, geopolitical tensions and financial market volatility.

“Crude oil prices remained volatile, reflecting evolving supply-demand conditions …. financial markets have been driven by uncertainties surrounding the U.S.-China trade negotiations and Brexit,” the bank said in the statement.

Takeaway:

―― The RBI said it can address growth concerns by “supporting efforts to boost aggregate demand, and in particular, reinvigorate private investment activity, while remaining consistent with its flexible inflation targeting mandate.”

―― Economists believe the RBI has room for another 25-bps rate cut during the current fiscal year.

―― The RBI said it will “review comprehensively” the existing liquidity management framework by mid-July and suggest measures to simplify it. It also indicated that it will aim to communicate the objectives of its liquidity management more clearly.

Photo caption:

The Reserve Bank of India's accommodative stance signals its concern about global and domestic growth. (Photo by Press Trust of India)