India’s central bank cuts rates to near decade lows to revive growth

India, Asia’s third-largest economy, expanded by just 5 percent in the June quarter, its slowest pace since 2013. (AP)
Updated 04 October 2019

India’s central bank cuts rates to near decade lows to revive growth

  • Central bank to maintain its ‘accommodative’ policy stance ‘as long as it is necessary’ to revive growth
  • Asia’s third-largest economy expanded by just 5 percent in the June quarter, its slowest pace since 2013

MUMBAI: The Reserve Bank of India on Friday cut the key policy rate to its lowest levels in nearly a decade, stepping up its efforts to kickstart an economy growing at its slowest pace in six years.
The central bank, which also sharply trimmed its 2019-20 growth forecast, said that it will maintain its “accommodative” policy stance “as long as it is necessary” to revive growth, and ensure inflation remains within target.
The six-member Monetary Policy Committee (MPC) cut the repo rate by 25 basis points to 5.15 percent, for a fifth straight meeting this year and in line with expectations in a Reuters poll. The reverse repo rate was reduced to 4.9 percent.
And markets expect further easing after Friday’s reduction, with the RBI seen delivering another 15-basis point cut at its December policy, before an extended pause, according to a Reuters poll conducted before the policy review.
With the protracted Sino-US trade war raising the risk of a global recession, central banks around the world — including the US Federal Reserve and the European Central Bank — have ramped up monetary support in recent months.
India’s cumulative rate cuts totaling 135 bps make it the most aggressive central bank in Asia. The RBI’s repo rate is now at its lowest levels since March 2010, when it stood at 5 percent, following the global financial crisis.
“In our opinion, RBI as a central bank has done more than enough to stabilize economic settings. From here onward, monetary easing may not achieve much incrementally,” said Rupa Rege-Nitsure, chief economist of L&T Finance Holdings.
She said it is now the government’s task to remove structural constraints in the economy, with the RBI supporting this effort by fostering financial stability.
All six MPC members voted in favor of a rate cut and for retaining the accommodative stance, the statement said.
Markets wobbled after the RBI decision.
The broader NSE Index, which was up 0.60 percent before the policy decision, turned negative after the rate cut and was last trading down 0.62 percent. The 10-year benchmark bond yield rose to 6.63 percent from 6.59 percent before the announcement, while the rupee weakened slightly to 70.97 per dollar.
“While the recent measures announced by the government are likely to help strengthen private consumption and spur private investment activity, the continuing slowdown warrants intensified efforts to restore the growth momentum,” the MPC, said in its statement.
To revive the faltering economy, the government in September announced a steep cut in the corporate tax rate — to 22 percent from 30 percent — triggering the biggest intraday gain in Indian stocks in more than a decade.
Asia’s third-largest economy expanded by just 5 percent in the June quarter, its slowest pace since 2013, on the back of low consumer demand and a slowdown in government spending amid global trade frictions.
Surveys this week also showed the nation’s manufacturing and services sectors under increasing strain, underlining the difficulties facing businesses.
The weak GDP numbers prompted several economists to lower their growth projections. The RBI also cut its real GDP growth forecast for 2019-20 to 6.1 percent from a prior projection of 6.9 percent.
The RBI in its Monetary Policy Report (MPR) said it expects real GDP growth to recover in the back half of 2019-20 due to a favorable base effect and past monetary policy actions.
Inflation in August accelerated to a 10-month high but remained well below the central bank’s medium-term target of 4 percent for a 13th straight month. The RBI said it expects inflation to stay under this target through to the early months of fiscal 2020-21.
The central bank said that policy “transmission has remained staggered and incomplete.” It noted that the weighted average lending rate on fresh loans has fallen by just 29 bps, versus the 110 bps cut, ahead of today’s announcement.
Economists expect policy transmission to improve after the RBI mandated banks to link fresh loans to an external benchmark like the repo rate, or the rate on short-term treasury bills since the start of October.
“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.

Oil prices fall but losses limited by Brexit deal hopes

Updated 18 min 25 sec ago

Oil prices fall but losses limited by Brexit deal hopes

  • US retail sales in September fell for the first time in seven months adding to economy fears

LONDON: Oil prices fell on Thursday as industry data showed a larger than expected increase in US inventories but losses were limited after Britain and the EU announced they had reached a deal on Brexit.

Global benchmark Brent crude was down 37 cents at $59.05 in afternoon London trade while US WTI crude was also down 37 cents, at $52.99.

US crude inventories soared by 10.5 million barrels to 432.5 million barrels in the week to Oct. 11, the American Petroleum Institute’s weekly report showed, ahead of official government stocks data.

Analysts had estimated US crude inventories rose by 2.8 million barrels last week.

“US sanctions imposed on Chinese shipping company COSCO are seriously denting demand for imported crude ... This has a profound impact on US crude oil inventories as reflected in last night’s API report,” said Tamas Varga, an analyst at PVM Oil Associates.

“US refinery maintenance is not helping to reverse the current trend and further builds in US crude oil inventories can be expected in the next few weeks.”

The US imposed sanctions on COSCO Shipping Tanker (Dalian) and subsidiary COSCO Shipping Tanker (Dalian) Seaman & Ship Management for allegedly carrying Iranian oil.

Adding to concerns about the global economy — and therefore oil demand — data from the US showed retail sales in September fell for the first time in seven months. Earlier data showed a moderation in job growth and services sector activity.

Nevertheless, Brexit developments helped limit oil’s decline. Prime Minister Boris Johnson said Britain and the EU had agreed a “great” new deal and urged lawmakers to approve it when they meet for a special session at the weekend.

Analysts have said any agreement that avoids a no-deal Brexit should boost economic growth and oil demand.

However, the Northern Irish party whose support Johnson needs to help ratify any agreement, has said that it refused to support the pact.

Hopes of a potential US-China trade deal also supported oil. The commerce ministry in Beijing said China hoped to reach a phased agreement with Washington as early as possible.

But the German government has lowered its 2020 forecast for economic growth to 1 percent from 1.5 percent, the economy ministry said. It said Germany, Europe’s largest economy, was not facing a crisis.