New RBI chief delivers election cut for PM Modi in a surprise move

The surprise 25-bps rate cut came almost a week after the Centre unveiled an expansionary budget, which included $13 billion of help for consumers ahead of the poll that's due by May.

India’s new central bank chief delivered an unexpected interest rate cut, providing Prime Minister Narendra Modi with the kind of stimulus he needs to stoke economic growth in an election year.

In a sharp reversal from October, when the Reserve Bank of India took rate cuts off the table, Governor Shaktikanta Das -- who took office in December -- opened the door to more policy easing and brought growth firmly back onto the Monetary Policy Committee’s agenda. That was a departure from his predecessor Urjit Patel, whose singular aim was to meet the RBI’s 4 percent inflation mandate.

The surprise move came almost a week after Modi’s administration unveiled an expansionary budget, which included $13 billion of help for consumers ahead of the poll that’s due by May, and days after a top adviser to the prime minister said the RBI should cut rates.

Das, a career bureaucrat, was appointed shortly after Patel resigned as governor amid a heated public battle with the state, which led to questions about the central bank’s independence from politics. Modi’s government has been pushing the RBI to transfer more of its excess capital to the state as well as ease lending restrictions on banks to spur growth.

Government officials were quick to praise the RBI’s move, while economists were more cautious, concerned that the monetary and fiscal stimulus would be inflationary.

“A very balanced and pragmatic policy statement,” Economic Affairs Secretary Subhash Garg said after the rate move. It “underlines low inflation and high growth path for India for 2019-20.”

Das pointed to a sharp slowdown in inflation as justification for the 25 basis-point reduction, taking the repurchase rate to 6.25 percent. The MPC also reversed its policy stance to neutral from ‘calibrated tightening’ adopted in October.

“Reading between the lines, it appears that Mr. Das has changed the RBI’s paradigm overnight, to one where growth is the focus of policy and inflation merely an input into decisions,” said Freya Beamish, chief Asia economist at Pantheon Macroeconomics Ltd.

That opens the way for more rate cuts, she said, adding “we are worried by the U-turn and what this week says about the RBI’s frail autonomy and discipline.”

Market reaction to the surprise rate cut was subdued. The yield on the most-traded 2028 sovereign bonds fell just seven basis points, the rupee eked out a gain and the main stocks gauge closed flat on Thursday.

The U.S. Federal Reserve’s shift to a more dovish stance is giving emerging markets like India a reprieve after last year’s rate hikes. Central banks in the Philippines and Thailand also held rates steady this week.

Business Standard

Why PM Modi seems to have given up on hopes of transforming India

Modi's promise of a new political economy, one oriented around the private sector, productivity and growth was illusory.

India’s Prime Minister Narendra Modi is in a spot of trouble. He has to face reelection in a few months amid growing dissatisfaction with his government’s performance; he’s likely to use every lever available to eke out a win. One such lever, unfortunately, was the interim federal budget that his lame-duck government presented last week, to keep official machinery running till the next government can come in with a mandate and make decisions about taxation and spending. As many of us feared, Modi broke with bipartisan convention: He used the occasion essentially to launch his election appeal to India’s voters. And, unfortunately, it’s one that they have heard before.

The big news in the interim budget was that Modi intended to give smallholders a small annual income to supplement their earnings. Many other countries support their farmers similarly; India, in fact, uses a complex system of agricultural subsidies that is both inefficient and, arguably, breaches World Trade Organization rules. But, Modi’s intent in introducing the scheme at the very last moment — in fact, past the very last moment — isn’t to reform agricultural policy; he’s clearly hoping to address his rising unpopularity in rural areas. To some degree, his hand was forced: The main opposition Congress Party had announced plans for a minimum income guarantee just a few days earlier.

Modi didn’t stop there; he had a bunch of other goodies in the budget to throw to undecided voters, including a tax cut for low earners. As a consequence, the government won’t make its fiscal deficit target for the financial year and shifted its target for the next year by an even greater margin. The worst part is that there isn’t really any great crisis that would justify breaching fiscal rules, only electoral considerations.

Those who supported Modi prior to his election in 2014 imagining that he would lead India away from populist economics must be kicking themselves now that’s he turned out to be an arch-populist himself. The question is: Why? Why did a politician who during his campaign and his first days in office insisted that he would transform India’s economy return instead to the old vote-buying formula he had once mocked?

Perhaps because, when judged by his own promises, Modi’s term has been a failure. The government may claim that India’s economy is growing faster than it ever has, but there isn’t exactly a lot of optimism on the ground. Worst of all, his political foot-soldiers, the under-employed young men who fill India’s northern states, haven’t seen their lives change appreciably.

Just a couple of days before the budget, India got convincing proof of this failure. The government had long argued that unemployment wasn’t a problem. There wasn’t any data in the public domain to settle the question one way or another.

Business Standard