India's Central Bank Cuts Rates By 25 Bps

Daniel Fowler
October 9, 2019

The sales of commercial vehicles, a key indicator for the transportation sector, contracted by double digits in July-August."Reserve Bank of India (RBI)On the liquidity front, RBI said that overall liquidity remained surplus in August and September 2019 despite expansion of currency in circulation and forex operations by the Reserve Bank draining liquidity from the system".

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

"The latest rate cut is not enough to revive growth on its own, but given the agressive policies so far, it will have an impact", Shilan Shah, Senior India Economist at Capital Economics told Al Jazeera.

"Noting that the output gap has widened since its last meeting, the MPC was of the view that the continuing slowdown warrants intensified efforts to restore the growth long as the growth momentum remains as it is and till the growth is revived, RBI will continue to remain in an accommodative mode", Shaktikanta Das, Governor, RBI, said in the post-policy interaction with the media.

Markets wobbled after the RBI decision.

Last month, the government cut corporate tax rate by nearly 10 percentage points, a move which has a tax implication of Rs 1.45 trillion.

India's GDP grew by 5 percent for the June-ended quarter, its slowest level in six years.

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Surveys this week also showed the nation's manufacturing and services sectors under increasing strain, underlining the difficulties facing businesses.

Mr. Barua said RBI had clearly signalled its continued focus on reviving growth, implying that more rate cuts are in the offing.

The weak GDP numbers prompted several economists to lower their growth projections.

The RBI also cut its real gross domestic product (GDP) growth forecast for 2019/20 to 6.1 percent from a prior projection of 6.9 percent, citing forward-looking surveys that indicate persistently weak demand conditions will persist.

At 4.75%, India will still offer positive rates of return to investors seeking high yields, with inflation at 3.2% and well below the RBI's medium-term target of 4%. Third, an RBI rate cut will immediately reduce lending rates on retail/SME loans that are now linked to external benchmarks like the RBI repo rate.

"With inflation expected to remain below target in the remaining period of 2019-20 and Q1 FY21, there is policy space to address these growth concerns by reinvigorating domestic demand within the flexible inflation targeting mandate", he said. The cumulative policy repo rate has been reduced by 110 bps during February-August 2019.

"The RBI is likely to continue with its campaign for more rapid transmission of the benefits to credit users", said K. Joseph Thomas, research head at Emkay Wealth Management.

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