Slowing consumer demand, growth risks fuel calls for interest rate cuts

By Anup Roy

India’s slowing consumer demand and concerns over the global economy could push the central bank to consider interest rate cuts despite worries over inflation, some economists say.
 

Factory output slowed and consumers are turning more pessimistic about employment prospects, latest figures show, signs that economic growth may come under pressure, according to economists at Nomura Holdings Inc. and Deutsche Bank AG. High borrowing costs are also dampening overall demand in the economy, holding businesses back from investing and curbing growth, they say. 

The Reserve Bank of India has kept interest rates unchanged for more than 18 months, with Governor Shaktikanta Das saying last week that food prices remain a worry and would keep inflation above its 4 per cent target. While data Monday showed inflation dipped below that level in July, that was largely due to statistical reasons, and unlikely to prompt the RBI to ease. 

Deutsche’s economist Kaushik Das said it’s “time to focus on growth risks as well,” with the economy increasingly showing signs of stress.

Industrial production figures released Monday showed a slowdown in factory output to 4.2 per cent in June from 6.2 per cent in the previous month. Last week, the RBI revised down its economic growth forecast for the April-June quarter to 7.1 per cent from 7.3 per cent, citing a slower pace of spending by the government and lower than anticipated corporate profitability. Separately, RBI data showed consumer confidence fell for the second consecutive month. 

With private consumption making up about 57 per cent-58 per cent of gross domestic product, the drop in consumer confidence “warrants close monitoring,” said Deutsche’s Das. Global growth risks have “risen considerably,” he said, and the RBI must “fine tune the monetary policy decision accordingly.” 

Nomura’s economists say the RBI could move to cut rates as early as October. 

“The combination of softer growth and inflation, high real rates, along with increased degrees of freedom from the expected turn in the global monetary policy cycle indicates that the October meeting is live,” Nomura’s economists Sonal Varma and Aurodeep Nandi wrote in a note. 

However, Morgan Stanley and UBS Group AG argue that the RBI will stay on hold, even if the Federal Reserve begins cutting rates in September. 

“A robust growth cycle with a healthy productivity dynamic driven by capex is expected to remain underway, implying a higher neutral rate,” Morgan Stanley economists led by Chetan Ahya wrote in a note.