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Why has India's RBI cut rates again?

Wednesday, March 04, 2015 - 02:22

India's central bank has unexpectedly lowered its policy rate for the second time this year. As David Pollard reports, the government is pushing to revive economic growth as inflation cools.

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EDITORS PLEASE NOTE: THIS EDIT CONTAINS CONVERTED 4:3 MATERIAL A monetary sleight of hand from the Reserve Bank of India. The quarter point cut to seven and a half per cent took markets by surprise. The second such unscheduled decision to cut this year drove Indian bonds to 20-month highs. And follows hard on the heels of a new government budget for growth down the road - the cut something for now, according to junior finance minister, Jayant Sinha. (SOUNDBITE) (English) INDIA'S JUNIOR FINANCE MINISTER, JAYANT SINHA, SAYING: "Everybody is looking for a near-term boost to the economy. And I think with the rate cut coming as it does now, does provide that near-term boost to the economy as well." UPSOUND INDIA'S FINANCE MINISTER, ARUN JAITLEY, SAYING: ''Estimated GDP for 14-15 is seen 7.4 per cent.'' The bank move is seen as its clear approval of a budget that Sinha's boss, Arun Jaitley, said would make India fly. Infrastructure spending to go up, corporate tax rates down and the timetable for reducing deficits extended. An 'inclusive' budget to help ordinary people, he said. And to revive growth - the main ambition of the bank, too, its statement outlining two areas of concern - capacity utilisation and weak production. Those, it says, making 'preemptive action' appropriate. One major variable in that plan: the struggle for growth outside India. China perhaps not the only worry, according to Allianz chief economic adviser, Mohamed A El-Erian. (SOUNDBITE) (English) MOHAMED A EL-ERIAN, CHIEF ECONOMIC ADVISER, ALLIANZ, SAYING: ''To the extent that one should worry about the external environment, and I certainly do, it has less to do with China and more to do with the divergence of economic performance and monetary policy in the advanced world. I think that one has to worry about Europe and Japan facing sluggish growth and downside risks.'' The other key variable: the price of India's main import, oil. For now, it's a positive - its slide - along with a relatively strong rupee - pushing inflation down from double digits in 2013 to just over five per cent now. Well within the bank's target range. (SOUNDBITE) (English) MOHAMED A EL-ERIAN, CHIEF ECONOMIC ADVISER, ALLIANZ, SAYING: ''You could see rates come down to six and half per cent as long as the budget is delivered, which means that the deficit numbers are met, not exceeded, and as long as you get an inflow of capital from the rest of the world.'' Growth is seen topping eight per cent in the next fiscal year. The government no doubt counting on the RBI's double flourish of cuts turning into a hat trick - or more - should it be necessary.

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Why has India's RBI cut rates again?

Wednesday, March 04, 2015 - 02:22