June 6, 2019 / 6:43 AM / 3 months ago

India's central bank cuts rates, turns 'accommodative' as economy slows

MUMBAI (Reuters) - The Reserve Bank of India cut its policy interest rate by 25 basis points in a widely expected move on Thursday, while also changing its policy stance to “accommodative,” after latest data showed the economy growing at its slowest in over four years.

“A sharp slowdown in investment activity along with a continuing moderation in private consumption growth is a matter of concern,” the bank’s monetary policy committee (MPC) said in a statement after making its third cut since February.

Entering its second term following a landslide election victory last month, Prime Minister Narendra Modi’s government is expected to launch a fresh wave of economic reforms to unlock the growth after the unemployment rate rose to a multi-year-high of 6.1% in the 2017/18 fiscal year.

Asia’s third largest economy grew at a much slower-than-expected 5.8% in the last quarter, far below the pace needed to generate jobs for the millions of young Indian’s entering the labour market each month.

The reduction in the repo rate to 5.75 percent matched predictions by 44 of 66 analysts polled by Reuters. The reverse repo rate was reduced to 5.50 percent. The MPC cut rates by the same amount at its last two meetings.

All six of the panel voted for a 25 basis points cut, and for the stance to be changed to “accommodative” from “neutral”.

The MPC said it had factored in global economic conditions, noting that leading indicators point to slowing growth in the United States, Europe and China.

“Going by the macro undercurrents, the rate-cutting cycle will continue in the coming quarters as well,” said Rupa Rege Nitsure, chief economist at L&T Financial. “Today’s policy actions ... give a clear signal that the RBI will continue with easy monetary conditions until it sees a definite improvement in growth-inflation mix.”

Markets reacted to the rate cut and change in stance as the 10-year benchmark bond yield fell to 6.89% from 7% before the policy announcement, while the rupee strengthened to 69.28 per dollar from 69.36 earlier.

RBI EXPECTS BETTER POLICY TRANSMISSION

Two new cabinet committees were announced on Thursday to find ways to spur job creation and investment.

New Finance Minister Nirmala Sitharaman could propose tax cuts to boost demand when she presents her maiden budget on July 5.

Addressing a press conference after the MPC meeting, RBI Governor Shaktikanta Das said the government had broadly followed the fiscal consolidation roadmap over the last five years, and he expected it to remain fiscally prudent.

The RBI lowered its growth forecast for the 2019/20 April-March fiscal year to 7%, having previously forecast 7.2% growth.

The outlook for retail inflation in the six months to end-September was raised to 3.0-3.1%, just up from the outlook of 2.9-3.0% given in April. The inflation outlook for the back half of the fiscal year in March was put at 3.4-3.7%, down from an earlier projection of 3.5-3.8%.

“The headline inflation trajectory remains below the target mandated to the MPC even after taking into account the expected transmission of the past two policy rate cuts,” the MPC said.

While subdued inflation gave the RBI leeway to lower rates, persuading commercial banks to cut lending rates by a similar scale has been a struggle, as many are hobbled by bad loans, and also fear losing customers if they cut deposit rates too far.

A series of defaults by Infrastructure Leasing and Financial Services (IL&FS) last year, has also stirred major unease over the health of Indian’s non-banking finance companies, raising fears of a contagion and pushing up their borrowing costs.

A security guard stands next to the logo of Reserve Bank of India (RBI) inside its headquarters in Mumbai, India, December 5, 2018. REUTERS/Francis Mascarenhas

Still, the RBI chief said he was confident that changes in policy rates would be transmitted more strongly and more quickly to market rates, with the MPC noting that yields on longer-tenor bonds have begun to reflect recent rate cuts.

“Our expectation is that as we go forward there will be higher transmission and then there will be faster transmission also,” Das said.

Reporting by Swati Bhat and Euan Rocha; Editing by Simon Cameron-Moore

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