Before India votes, RBI cuts rates by 25 bps to spur growth

Published: April 4, 2019

STORY: India’s central bank cut its policy interest rate by 25 basis points on Thursday (April 04), in a widely expected move to boost the economy just a week before voting begins in an election that will decide whether Prime Minister Narendra Modi gets a second term.

Though inflation remains subdued, falling farm incomes and record high unemployment are seen hampering Modi’s prospects going into the polls after economic growth slid to 6.6 percent in December – its slowest in five quarters.

Following a meeting of its monetary policy committee (MPC), the Reserve Bank of India highlighted the need to boost domestic growth due to global headwinds.

“The Monetary Policy Committee (MPC) voted to reduce the policy rate by 25 basis points while maintaining a neutral stance”, Governor Shaktikanta Das told reporters in Mumbai.

While the central bank projected retail inflation at 3.8 percent by January-March 2020 – within its target of 4 percent – it also warned of the upside risks to price pressures if food and fuel prices rose abruptly, or if fiscal deficits overshot targets.

With inflation so low, some analysts had hoped the RBI would cut interest rates more aggressively to boost economic growth.

The MPC’s reluctance could be partly explained, however, by commercial banks only reducing their lending rates by a token 5-10 basis points after the RBI’s last 25 bps cut in February.

“There has to be a effective transmission of rates and it is a work in progress and we hope to come out with some guidelines which will ensure effective transmission”, Das said.

Ahead of elections, the major parties have made promises for heavy spending in order to woo voters, leaving the central bank unsure about how fiscal plans will pan out.

Speaking at an industry event, Finance Minister Arun Jaitley said that the government would continue with fiscal consolidation and pursue policies to enable further reduction in interest rates if it was re-elected.

Prime Minister Narendra Modi is seek a second term in a general election that will begin next week. Voting will be staggered across the country over several weeks and the result will be known on May 23.

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