The Reserve Bank of India on Friday cut its benchmark interest rates for the fifth time this year on Friday. The RBI monetary policy committee announced a 25 basis points cut in its policy rates in an effort to boost a sluggish economy as inflation remains in a comfortable zone.
A Mint survey of bankers and economists had said that RBI is expected to reduce policy rates by 25 basis points, while a minority expected a 40 basis points cut.
The committee said it would maintain an “accommodative stance” as long as it is necessary to revive growth while ensuring that inflation remains within the target”. This leaves room for more rate cuts in future.
The central bank’s panel has also reduced its growth forecast for the current fiscal from 6.9% to 6.1% earlier. The committee observed that risks to growth had emerged due to weak domestic demand and sagging export prospects on account of continuing trade tensions. The panel has, however, retained its consumer price inflation forecast for the second half of the financial year and pegged it at 3.5%-3.7%. India, Asia’s third-largest economy, grew by just 5% in the June quarter, in the slowest pace since 2013.
The government has already announced a series of measures, including a steep cut in corporate tax and rollback of enhanced surcharge on Foreign Portfolio Investors, among others to jump-start growth.
The MPC meeting comes in the backdrop of RBI’s mandate to banks to link their loan products to an external benchmark, like repo rate, for faster transmission of reduction in policy rates to borrowers, from October 1.
Inflation in August accelerated to a 10-month high but remained well below the central bank’s medium-term target of 4% for a 13th straight month. Retail inflation inched up to 3.21% in August.
The government has mandated RBI to ensure that inflation remains below 4%, with a deviation of 2% on either side.
Policymakers are drawing solace from the fact that retail inflation remains in RBI’s target even though economic activities are showing signs of sluggishness.
Traders will focus on the wording and tone of the monetary policy statement for clues on further easing if the RBI delivers cut as expected.
Economists also said the policy transmission process could improve after the RBI mandated banks to link all fresh loans to an external benchmark like the repo rate or the rate on short-term treasury bills since the start of this month.
Banks have passed only a small portion of the RBI’s cuts this year to customers.