More rate cuts? RBI vows to ease monetary policy as 'long as necessary'

RBI Governor Shaktikanta Das pledged further monetary policy easing if needed after reducing interest rates for a fifth time to boost a flailing economy.

The Reserve Bank of India lowered its benchmark repurchase rate by 25 basis points to 5.15 per cent on Friday, in line with the forecasts of a majority of economists surveyed by Bloomberg. Echoing Mario Draghi’s “whatever it takes” sentiment, Das said policy makers will “continue with the accommodative stance as long as it is necessary to revive growth while ensuring inflation remains within the target.”

Growth in the consumption-driven economy has taken a beating amid rising unemployment and ongoing stress in the banking system, contributing to a collapse in demand for everything from 7-cent cookies to cars. The RBI on Friday lowered its full-year growth forecast to 6.1 per cent -- which would be a seven-year low -- from 6.9 per cent previously.

“There is policy space to address growth concerns,” Das said. He last month alluded to the chance of more easing, given concerns about economic growth.

Central banks around the world are loosening monetary policy to offset a global slowdown made worse by US-China trade tensions. 

Australia cut rates earlier this week for the third time this year, while the Philippines and Indonesia eased policy last month.

Friday’s rate cut was a unanimous decision by all six members of the Monetary Policy Committee, although one member voted for a steeper 40 basis-point easing. It takes the repurchase rate to the lowest in almost a decade and reduces the inflation-adjusted real rate below 2 per cent. Like other emerging markets, the RBI needs to keep the rate attractive enough to lure foreign funds into the country to finance its current-account and budget deficits.

After an unconventional 35 basis-point move in August, the RBI reverted to a 25-point reduction, disappointing bond investors who had expected a more aggressive reduction. The benchmark stock index and the rupee fell, reversing early gains, while yields on India’s 10-year bonds jumped 4 basis points to 6.65 per cent.

The market reaction reflects “over-exuberance about bigger rate cuts getting dented,” said Naveen Singh, head of fixed-income trading at ICICI Securities Primary Dealership in Mumbai. There’s also some disappointment that the governor himself voted for just a 25 basis-point cut, he said.

The government’s recent fiscal measures, including a $20 billion tax break for companies, have given the RBI room to shift to a more gradual pace of easing again. Das said the measures announced by the government over the last two months are expected to revive sentiment and spur domestic demand, especially private consumption.

What Bloomberg’s economist says

“The Reserve Bank of India’s baby-step rate cut of 25 basis points isn’t enough to reverse a severe slump in the economy. The sharp downgrade of its full-year growth outlook shows it recognises the extent of the challenges.”

The RBI has cut rates by a total 135 basis points so far this year, prompting some economists to question how much more easing room the RBI has.

“I think they have done enough and, given a considerable policy transmission lag, they should allow the easing so far to bear fruit,” said Prakash Sakpal, an economist at ING Groep NV in Singapore. “Or else, the authorities are running the risk of aggressive fiscal and monetary pump-priming eventually fueling inflation.”

While the RBI underlined a dim global growth outlook as a risk to domestic expansion, it is also facing mounting problems in the banking system. It recently imposed withdrawal curbs on a small bank and lending restrictions on another lender.

The “RBI would not allow a cooperative bank to collapse,” Das said, referring to an almost $1 billion scandal at a small bank. Talks are on with the government on regulation of tiny banks, he said, seeking to reassure the market about how the banking system “remains sound and stable.”

The central bank raised its near-term inflation forecast slightly to 3.4 per cent for the second quarter of the fiscal year started April, while projecting it would stay below its medium-term target of 4 per cent -- a level it has undershot for 13 straight months.

The government said the revised inflation forecast is still within the central bank’s target. The rate decision will complement its efforts to boost growth.