Boost for Modi as India central bank cuts interest rate

Boost for Modi as India central bank cuts interest rate
India’s central bank delivered a third consecutive interest rate cut on Thursday in a boost to newly re-elected Prime Minister Narendra Modi as he grapples with sluggish economic growth. (File/AFP)
Updated 06 June 2019

Boost for Modi as India central bank cuts interest rate

Boost for Modi as India central bank cuts interest rate
  • The Reserve Bank of India (RBI) said the benchmark repo rate would be reduced by 25 basis points to 5.75 percent
  • The RBI said in a statement that the cut would help “efforts to boost aggregate demand” and “reinvigorate private investment activity”

MUMBAI: India’s central bank delivered a third consecutive interest rate cut on Thursday in a boost to newly re-elected Prime Minister Narendra Modi as he grapples with sluggish economic growth and decades-high unemployment.
The snip in borrowing costs to a nine-year low comes as central banks around the world adopt a more dovish tone on monetary policy amid a slowdown in the global economy.
Modi, 68, stormed back to power last month with a greater majority despite question marks over his economic record during his first term as leader of Asia’s third-largest economy.
The new government was dealt a twin blow as it took office last week when data showed rising unemployment and economic expansion falling to a five-year low.
The Reserve Bank of India (RBI) said the benchmark repo rate — the level at which it lends to commercial banks — would be reduced by 25 basis points to 5.75 percent.
It was the third reduction this year under governor Shaktikanta Das, a Modi ally who was appointed in December after his predecessor quit following a spat with the government over alleged interference.
The decision was predicted by 31 out of 43 economists surveyed by Bloomberg News.
The RBI said in a statement that the cut would help “efforts to boost aggregate demand” and “reinvigorate private investment activity.”
Growth suffered a third straight quarterly decline in the first three months of 2019 to 5.8 percent, down from 6.6 percent in the last quarter of 2018, according to data released Friday.
The announcement meant India had lost its place as the world’s fastest-growing major economy to China, which is currently on 6.4 percent growth.
The Indian government also estimated that the economy grew by 6.8 percent in the year up to March 31, down from 7.2 percent the year before.
The RBI revised down its growth projection for 2019-20 from 7.2 percent to 7.0 percent, noting that the global economy has been “losing pace” as it cited the US-China trade war.
“Weak global demand due to escalation in trade wars may further impact India’s exports and investment activity,” it warned as it changed its monetary policy stance from neutral to accommodative, hinting that more cuts are on the horizon.
“We expect (the RBI) to cut rates by an additional 50 basis points through the year,” said Garima Kapoor, an economist at Elara Capital.
This week, US Federal Reserve chief Jerome Powell signalled a willingness to cut rates as he acknowledged that trade conflicts had dimmed America’s growth outlook.
Delayed official figures also released on Friday showed that India’s unemployment rate hit a 45-year high of 6.1 percent last year.
The numbers came out only hours after Modi named Nirmala Sitharaman as new finance minister in his government, presenting an immediate challenge to his new administration.
On Wednesday, the right-wing government announced that it would create two new cabinet committees tasked with figuring out how to stimulate job creation and investment.
While the economy has regularly grown at about 7.0 percent since Modi came to power in 2014, it has failed to create enough jobs for the 1.2 million Indians who join the labor market each month.
The unemployment data was for 2017-2018 and should have been released before the six-week-long election which began in April.
The figures were leaked by a newspaper in January which called them the worst since 1972-73. The government insisted then that the report was not ready.
Sitharaman is due to present the annual budget on July 5.