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RBI delivers a pre-election rate cut gift to Modi but is it enough?

Reuters  |  NEW DELHI 

By Manoj Kumar

NEW DELHI (Reuters) - The Reserve Bank of India's (RBI) surprise decision to cut interest rates for the first time in 18 months on Thursday is a pre-election stimulus gift from a compliant for

But businesses and farmers - and even some of his own supporters - say it may be too little, too late to help the ahead of voting, which must be held by early May.

The quarter-point reduction in the benchmark repo rate follows intense pressure late last year on the RBI to listen to government and business concerns and ease

The threat to the RBI's autonomy led to the departure in December of its governor, Urjit Patel, and his replacement by Shaktikanta Das, whose views were much more in line with the

There have been signs that Modi's support has crumbled in parts of a countryside that supported his Hindu in the last election in 2014. Among the voters' biggest concerns are the impact of low farm prices on rural incomes and whether there is enough job creation.

The rate cut will benefit as it will boost economic growth and lending to small businesses, according to Ashwani Mahajan, a of the economic wing of the powerful Hindu group, Rashtriya Swayamsevak Sangh, which is the fountainhead of the BJP.

But it still wasn't enough, he said.

"The new has passed the litmus test, though with 50 percent marks," said Mahajan, co-convenor of the Swadeshi Jagran Manch, adding that the rate cut should have been at least half a percentage point.

Four of six members of the RBI's committee (MPC) voted to cut the rates, while all six members voted for a change in the stance to "neutral" from "calibrated tightening".

The RBI also eased for non-banking companies and raised the limit on "collateral free" farm loans in an attempt to boost lending to nearly 120 million rural households.

In recent weeks, it has also eased curbs on some and is set to provide the government with a bigger dividend out of surplus funds.

The BJP welcomed the decisions as they will help to dispel any perceptions that the government has not addressed credit issues facing businesses. Some of those issues worsened dramatically after the government suddenly banned the use of then existing high-denomination banknotes in 2016 and hastily introduced Goods and Services Tax (GST) in 2017.

The rate cut comes after the government introduced a budget last week that also provided stimulus for the economy, including handouts for farmers and modest tax cuts for the lower middle class.

Gopal Krishna Agarwal, the BJP's on economic affairs, said the government had been asking the RBI to cut rates for some time.

"The decision would supplement government's measures announced in the budget and will boost lending to farmers, housing and manufacturing sectors," he said.


Despite all the lobbying that has been going on, the rate cut was still a surprise for financial markets. Most economists had expected rates to be left unchanged and then possibly cut at the next meeting in April.

But the faster-than-expected move isn't likely to help the much, they said.

"The rate cut is unlikely to give a major fillip to investments as capacity utilisation still remains low in the manufacturing sector," said Devendra Kumar Pant, chief economist, Ratings & Research, the arm of rating agency

It could sow the seeds for - especially when added to the fiscal stimulus in the budget - in the second half of the next financial year, which begins on April 1, he warned.

Mark Williams, Chief of in London, said there was a growing perception that RBI had allowed its focus on controlling to slip, and therefore higher and higher interest rates were likely over the long term.

Some economists also felt that there was a danger that a largely independent RBI could come under government pressure - providing too much stimulus for the after last week's budget handouts.


Some politicians and stock market analysts said the rate cut decision may not improve Modi's chances in the election as the banks could take time to pass on rate cut benefits.

The BJP lost three key state elections to the opposition late last year and national polls have indicated that Modi faces a tough re-election battle against a resurgent opposition as and regional parties form alliances.

The rate cut also underlines fears about slowing economic growth.

The MPC announced on Thursday that it had trimmed its economic growth forecast to 7.2-7.4 percent for the period from April-September this year from its previous 7.5 percent estimate.

Business and farm leaders said they were also sceptical about the impact of the rate cut - and said it was the inability to borrow that was the biggest problem.

"Our loan requirement has been rising as fertiliser and diesel prices are going up. Many times, we borrow from private moneylenders at a rate of 24 percent as banks refuse to lend us more," said Deshpal Rana, a from Shamli in

Praveen Khandelwal, of the Confederation of All Traders, a traders lobby group, said a majority of India's traders and small manufacturers were finding it difficult to borrow from banks, who are struggling to deal with $150 billion in distressed assets.

"Today's repo rate would largely benefit bankers rather than borrowers," he said.

($1 = 71.4680 rupees)

(Additonal reporting by Rajendra Jadhav in MUMBAI; Editing by Martin Howell and Nick Macfie)

(This story has not been edited by Business Standard staff and is auto-generated from a syndicated feed.)

First Published: Thu, February 07 2019. 20:12 IST