The monetary policy committee (MPC) of the Reserve Bank of India (RBI) slashed policy rates for the fifth consecutive time on Friday and reduced its estimate of growth for the year to 6.1% but suggested that an economic revival may already be underway.
The 25 basis point reduction in policy rates is in keeping with a forecast by Reuters poll of economists. One basis point is one hundredth of a percentage point. Friday’s announcement marks a 135 basis point reduction in the policy rate since August 2018. This means loans have become cheaper for corporate borrowers as well as individuals funding everything from houses to cars to vacations, although not all the reduction has been passed on yet.
Despite being on expected lines, the MPC resolution has triggered concerns about the Indian economy. This is because the rate cut was accompanied by an 80 basis point reduction in projected GDP growth for the current fiscal year to 6.1%. The MPC has been continuously slashing its growth forecast for the Indian economy this year. This figure was 7.4% in the February meeting of MPC.
RBI’s downward revision in India’s GDP growth projection has come a week after a 70 basis point reduction by the Asian Development Bank (ADB). The ADB expects the Indian economy to grow 6.5% in the current fiscal year instead of its earlier projection of 7.2%.
The resolution adopted by the MPC is categorical in admitting the economic slowdown. “The continuing slowdown warrants intensified efforts to restore the growth momentum,” it notes. This is in keeping with the MPC retaining an accommodative stance, which does not rule out future reductions in the policy rate.
To be sure, the MPC resolution has hinted that the Indian economy has already bottomed out and a recovery might be underway. It projects GDP growth in the September quarter to be 5.3%, and accelerate further to 6.6%-7.2% in the second half of the year. The Indian economy has been losing growth momentum for five consecutive quarters, with GDP growth reaching a six-year low of 5% in the June quarter, the latest period for which data is available.
The rate cut aims at reducing rates of lending by commercial banks, also reducing the equated monthly instalment (EMI) burden of retail consumers and stoke consumption, which will eventually boost growth.
The finance ministry said in a statement that the government has “taken note of the revised growth projections” by the MPC at 6.1% for 2019-20 along with growth projections made by other institutions. Friday’s rate cut “will complement the recent measures taken by government to accelerate growth”, the statement said.
Speaking at a press conference after the MPC meeting, RBI governor Shaktikanta Das expressed confidence that the government will stick to its fiscal deficit targets despite announcing a cut in corporate tax rates which would lead to a revenue loss of ~1.45 lakh crore. Das also denied reports that the government had demanded an interim dividend from the central bank.
Capital markets registered a sharp fall after the announcement. The BSE Sensex closed 433.56 points, or 1.14%, lower at 37,673.31 and the Nifty fell 139.25 points (1.23%) to close at 11,174.75. “Today’s market fall was mainly because of RBI slashing FY20’s GDP growth target to 6.1% from its earlier forecast of 6.90% on the back of weakening domestic demand conditions,” said Shrikant S Chouhan, senior vice-president of equity technical research at Kotak Securities.
The fall ended a week in which Sensex has lost 3% since last week’s close.
Vinod Nair, head of research, Geojit Financial Services, said, “Despite RBI and the government’s synchronised effort to offset a slowdown in the economy, investors have taken a pessimistic view due to continued downward revision in GDP estimate and new stress in the banking system. The government’s measures do have the potential to enhance consumption and spur investment but lag in transmission of cumulative rate cuts is adding a layer of complexity in the recovery.”
Experts said that consumption — particularly loans for buying houses or vehicles — would not get a boost unless commercial banks transmit the benefit of the policy rate cuts. “Despite a cumulative reduction of 135 basis points in policy rates, weighted average lending rates on fresh loans have come down by just 29 basis points,” said Sanjay Dutt, MD and CEO, Tata Realty & Infrastructure Ltd. “A more decisive 30-40 basis point cut was envisaged by many and markets overall are disappointed,” he added.
Chandrajit Banerjee, director general, Confederation of Indian Industry, said: “The cumulative 135 basis rate cuts this year so far along with the slew of measures announced by the government in the last few months to provide growth stimulus to a variety of sectors including the corporate tax rate cut is expected to lift growth from its current stupor and unleash animal spirits.”