The Indian Wire » Business » RBI cut interest rates again to 5.15% with inflation at its lowest :Poll
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RBI cut interest rates again to 5.15% with inflation at its lowest :Poll

India’s central bank, Reserve Bank of India, which controls the issue and supply of the Indian rupee is going to cut interest rates in December for the sixth time this year, and again before July, according to economists in a Reuters poll who forecast those reductions would either marginally boost the economy or have no impact. The RBI has cut rates by 135 basis points this year to 5.15% but inflation has remained low by historical standards.

The Indian economy expanded 5.0% in the April-June quarter on a year earlier, its slowest annual pace since 2013, and was expected to grow 4.7% last quarter, according to the latest Reuters poll, taken Nov. 20-25. That was significantly lower than the 5.6% rate predicted in the last poll and would mark six consecutive quarters of slowing growth, a first since 2012. It also comes despite a recent series of fiscal stimulus from Prime Minister Narendra Modi’s government, which was re-elected in a landslide in May.

“Further rate cuts are likely to have a limited impact on the economy as the cost of borrowing is not the pressing issue. The lack of risk appetite and fragile sentiment are holding back fresh investment in the economy,” said Sakshi Gupta, senior India economist at HDFC Bank.

“While further interest rate cuts would support growth at the margin, we need to see a turnaround in sentiment to restart the investment cycle.” Recent business surveys have suggested the economy would not improve in the near-term.

The latest Reuters poll predicted the RBI would cut its repo rate for the sixth time in a row by 25 basis points to 4.90% at its Dec. 3-5 meeting, according to median forecasts from more than 70 economists. That would mark the longest streak of consecutive rate cuts since the current interest rate framework was introduced nearly 20 years ago.

“We don’t expect any miracles from lower borrowing rates,” said Hugo Erken, head of international economics at Rabobank. “To push India’s growth trajectory back on track, the government should step up its efforts by forging a reform package which tackles labor market rigidity, housing market woes, et cetera.”

The RBI is then expected to chop another 15 basis points in the second quarter of 2020, taking the repo rate to 4.75%, where it will stay at least until 2021, according to the poll. Those expectations of further rate cuts come despite inflation breaching the RBI’s medium-term target of 4% for the first time in 15 months in October.

Still, a significant majority of respondents to the poll, 35 of 56, said the ongoing economic slowdown would last for at least another six months.

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