One More Rate Cut Seen as World's Fastest-Growing Economy Slows

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India's central bank is on course for its most aggressive monetary policy easing in more than three years, as it seeks to support the world's fastest-growing major economy in the face of risks both at home and abroad.

The Reserve Bank of India delivered its second successive interest rate cut Thursday and said it stands ready to use all tools available to ensure liquidity in the banking system, after lenders failed to fully pass on the previous cut to borrowers.

Economists predict the RBI will cut at least once more, possibly as early as June, as businesses rein in investments amid political uncertainty fueled by elections starting next week. With consumption taking a hit due to a crisis in the shadow banking sector and exports stagnating because of a global slowdown, India's growth prospects have considerably dimmed.

Traders were disappointed the RBI didn't shift its policy stance from neutral to signify more aggressive action, prompting the rupee and bonds to drop.

The central bank, which targets inflation at 4 percent in the medium term, lowered its forecast for consumer price growth and said underlying pressures could ease given the recent slowdown. The RBI also downgraded its growth projections.

“With the inflation outlook remaining benign, the RBI will address the challenges to sustained growth of the Indian economy, while ensuring price stability on an enduring basis,” Governor Shaktikanta Das told reporters in Mumbai. He added that there was a need “to strengthen domestic growth impulses by spurring private investment, which has remained sluggish.”

Read More: Patience Is Golden as Central Bankers Hit the Pause Button

Companies have shied away from borrowing in a market that was home to one of the highest real rates of interest. The total value of new projects fell to 1.99 trillion rupees ($29 billion) in the quarter to March from 3.12 trillion rupees in the three months through June, according to data from the Center for Monitoring Indian Economy. The latest purchasing managers' survey also point to a slowdown in the manufacturing and services sectors.

Rate Reversal

Thursday's cut reverses the 50 basis points of increases delivered by the RBI in 2018 and dragged the real interest rate below Malaysia and Indonesia. It also marks the most aggressive easing by any major emerging market central bank this year as the U.S. Federal Reserve shifts to a more dovish policy stance.

Banks have been slow to pass on the RBI's rate cut to consumers, citing higher interest rates on deposits and competition from the government for small savings.
“Rate cuts are important but sustained focus to ensure its transmission to the economy are crucial to provide support to growth," said Anubhuti Sahay, head of south Asia economic research at Standard Chartered Plc in Mumbai, who expects one more rate cut this fiscal year.

The RBI said it will continue to add liquidity to ease constraints in the banking system. Das said he will use all instruments including open-market bond purchases and foreign currency swap auctions to inject cash and ease financial conditions after economic growth in the quarter to December hit a six-quarter low.

What Bloomberg's Economists Say

The key to the recovery in growth, though, will be transmission of the RBI's lower policy rates to lower deposit and lending rates. Governor Shaktikanta Das signaled that liquidity would be a focus, saying the RBI would use all available tools to ensure liquidity. What's more, the RBI's revised-down projections on inflation and growth bolsters our confidence that it will support banking sector liquidity moving into surplus -- which we think is essential to aid transmission of its monetary policy.

-- Abhishek Gupta, India economist
Click here to read the full report

The growth slowdown is a setback for Prime Minister Narendra Modi, who came to power in 2014 on the back of pledges to reform the economy and create 10 million jobs each year. Modi is seeking a second term in office in elections starting April 11.

Uncertainty about the poll outcome has fueled worries about policy continuity and has clouded the economic outlook.

Aurodeep Nandi, an economist at Nomura Plc in Mumbai, said he has a more bearish outlook on economic growth of 6.8 percent in the current fiscal year. “Contained inflation amid growth disappointment will open up space for further policy easing,” with another 25 basis-point cut expected, most likely in June, he said.

--With assistance from Rahul Satija.

To contact the reporter on this story: Anirban Nag in Mumbai at anag8@bloomberg.net

To contact the editors responsible for this story: Nasreen Seria at nseria@bloomberg.net, Karthikeyan Sundaram, Ravil Shirodkar

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