India’s central bank has cut interest rates for a fourth time this year, slashing its key lending rate to the lowest level in nine years in a bid to support the country’s faltering economy.
The Reserve Bank of India said Wednesday that another rate cut was needed to boost growth and private investment. Shaktikanta Das has now cut rates at each of his four meetings since taking over as governor of the central bank in December.
The economy has slumped in recent months, with gross domestic product growth falling from 6.6% to 5.8% in the quarter ended March — slower than China’s for the first time in more than a year and the weakest since 2014.
India is struggling to get growth back on track aftera credit crunch caused by problems among consumer finance providers anda slowdown in spending around its recent general election. It’s also feeling the effects of the global downturn, said Anubhuti Sahay, senior India economist at Standard Chartered.
“In this kind of a scenario, when the cycle is turning lower, the monetary policy has turned more supportive, and clearly indicates that they are now more focused on growth, given the weakness in the overall pace of economic activity,” she said.
Cautious consumers
Under pressure from weak growth in wages and widespread unemployment, consumers are putting saving before spending, said Kunal Kundu at Societe Generale.
“India’s growth engine seems to be running out of steam,” he wrote in a research note.
The real picture could be even worsethan the official data suggest. The country’s former chief economic adviser, Arvind Subramanian, said in June that India’s growth figures for the past several years may have been a “significant overestimation.”
The rate cut, which was bigger than economists had expected, reduces the rate at which the RBI lends to banks to 5.4%. It was last that low in April 2010.
There could be more cuts to come.
The bank will likely slash its interest rate again at the next meeting in October, Shilan Shah, India economist at Capital Economics, wrote in a note on Wednesday.
The appointment of Das as governor raised questions about the autonomy of India’s central bank, with his predecessor Urjit Patel abruptly resigning last year over reported differences with the government. Another of the bank’s deputy governors stepped down in June.
“An erosion of the RBI’s credibility could lead to a partial reversal in its success in reining in price pressures,” Shah wrote, saying a further cut would be a “misstep.”
The government has made it clear which way it wants the bank to go, with finance minister Nirmala Sitharaman saying in an interview with a local newspaper last week that a “significant rate cut would do a lot of good for the country.”
