More scope to cut interest rates, says RBI Governor Shaktikanta Das

Das said he hoped a recent trade deal between the United States and China would hold and not be reversed.

There is scope for cutting interest rates further and the central bank will use it when required after studying the growth and inflation data, Reserve Bank of India (RBI) Governor Shaktikanta Das said on Monday.

The monetary policy committee (MPC) surprised markets and analysts this month by holding rates steady after trimming the key interest rate by 135 basis points since the beginning of the current rate reduction cycle in February.

“While taking a pause we, very carefully and very definitely, said there is space for further monetary policy action, but the timing will have to be decided in a manner that its impact is optimum and its impact is maximised,” Das said at a conclave organised by the Times media group. Das said the markets were surprised when the committee started cutting rates in February but subsequently accepted that it was right in doing so. “And this time, the pause we have taken, I do hope that events will unfold in a manner which will prove that the MPC decision is right,” Das said.

He said both the government and the central bank had taken steps to help the economy recover but the outcome of events in the global economy would play a role.

Das said he hoped a recent trade deal between the United States and China would hold and not be reversed. The “Phase one” agreement reduces some US tariffs in exchange for a big jump in Chinese purchases.

“What is important in the current context is coordinated and timely action by all the advanced and emerging economies to revive growth,” he said.

“Growth is an issue of discussion in India and global growth is also an issue of discussion because that does impact. For a moment, I am not implying that the slowdown that we have seen in India is entirely due to global factors, but it does impact growth prospects for India.”

India’s economic growth slowed to 4.5 per cent in the July-September quarter.

Its weakest pace since 2013, this put pressure on Prime Minister Narendra Modi to speed up reforms as five rate cuts by the central bank have failed to boost investment. Das stressed the importance of communication for the markets and said the RBI had tried to be as clear and transparent as possible.

"Of course, communication should follow action and any communication should not be empty words, it should be followed by further action."...Read More

RBI likely to cut rates for sixth time this year, try help growth

RBI has delivered 135 basis points of interest-rate easing this year, but lenders have only transmitted a fraction of that to borrowers.

The Reserve Bank of India is set to deliver its sixth straight interest-rate cut Thursday, shrugging off a spike in inflation as it stays doggedly focused on supporting economic growth.

While all 34 economists surveyed by Bloomberg News as of Wednesday expect a reduction, the majority expect a quarter-point cut, with the rest expecting reductions of 15 basis points to 50 basis points. The RBI has cut borrowing costs by 135 basis points so far in 2019 to a nine-year low of 5.15%.

The meeting of the six-member Monetary Policy Committee led by Governor Shaktikanta Das, who completes one year in office next week, comes amid deepening concerns about growth, financial stability and weak public finances.

The policy decision will be announced at 11:45 a.m. in Mumbai, followed by a press conference 15 minutes later by Das. Here’s a look at what else to watch out for:

Growth trajectory

The RBI has lowered its growth forecast for the current fiscal year four times already, with the latest revision in October pegging expansion at 6.1%. Data since then has shown gross domestic product expansion slowing to 4.5% in the July to September period, the weakest pace in more than six years.

“With no imminent signs of a turnaround, we expect the RBI to cut rates by 25 basis points at its December meeting,” said Teresa John, an economist at Nirmal Bang Equities Pvt. in Mumbai. The July-September period saw economic slack deepen, with manufacturing contracting. A purchasing managers survey indicated that activity in the dominant services industry slowed during that period. With surveys for both manufacturing and services in November pointing to a rebound, it’s worth watching if and by how much the RBI will further lower its growth forecast.

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Explained: Why RBI's repo rate cuts are not enough to bolster GDP growth

Transmission of rate cuts by banks has been slow because any lowering of interest rate, with deposit rates unchanged, will reduce banks' net interest income spread, affecting their revenue.

Business Standard : In order to boost the country’s sagging economy, the Reserve Bank of India’s (RBI’s) monetary policy committee, holding its fifth bimonthly meeting from Dec 3 to 5, is widely expected to again cut the key repo rate by 25 basis points (bps).

Official data released by the government last week showed that India’s gross domestic product (GDP) growth in the July-September quarter of 2019-20 slowed to a 26-quarter low of 4.5 per cent, on a year-on-year basis, for a number of reasons. Weak manufacturing growth, a fall in consumer demand and private investment, and lower exports due to a global slowdown were cited as some of them.

For its part, the RBI has lowered the repo rate — at which commercial banks borrow from it — by a cumulative 135 bps so far this calendar year to 5.15 per cent, the lowest in nine years. Even so, there has been little recovery in the economy during this period. Let’s understand why.

Relation between interest rate and GDP

For any bank, its net interest income (NII) — the difference between the interest it receives on loans given and the interest it pays on deposits — is the main source of its revenue.

A change in lending rate affects the cost of raising funds in the economy. For instance, a cut in lending rate makes loans cheaper. This prompts industrialists to borrow more for, say, capacity expansion (investment), and households for private consumption. This has a direct bearing on the country’s GDP, which, by definition, is the sum total of private consumption, private investment, government investment/spending, and net exports.

However, any cut in banks’ lending rate, should they continue paying interest on deposits at the same rate as before, would reduce their NII spread. That would have a negative impact on their revenues. So, that should explain why banks have shied away from transmitting RBI’s repo rate cuts to borrowers in the form of lending rate cuts.

During its fourth bimonthly review in October, the MPC noted that policy “transmission has remained staggered and incomplete”. In response to a 110-bp cumulative cut in repo, the weighted average lending rate cut on fresh loans had been only 29 bps, it said.

RBI set to cut interest rate in August for the fourth time in a row: Report

They are going to cut rates in August and again later, mainly due to low growth and weak inflation, said an economist.

The Reserve Bank of India is set to cut interest rates in August for the fourth meeting in a row, according to a Reuters poll of economists, a majority of whom said risks to their already-modest growth forecasts were skewed more to the downside.

If the RBI does cut rates next month, it will be the most aggressive amongst dovish central banks in Asia. The last time the RBI delivered so many back-to-back cuts was after the global financial crisis over a decade ago, when most major central banks went on a cutting spree to revive economic growth.

Almost 80 per cent of 66 economists in the July 17-24 poll expected the RBI to cut its benchmark repo rate by 25 basis points to 5.50 per cent at the Aug. 7 meeting. Three respondents predicted a 50 basis points cut and the remaining 10 forecast policy on hold.

"It is baked in the cake. They are going to cut rates in August and again later, mainly due to low growth and weak inflation," said Gareth Leather, senior Asia economist at Capital Economics.

India's inflation has remained below the central bank's medium-term target of 4 per cent for almost a year and is not expected to rise significantly above that until at least 2021. The poll's findings support RBI Governor Shaktikanta Das' recent comments about the central bank's accommodative stance and suggests further easing.

Indeed, following next month's expected move, the next rate cut is seen in early 2020, after which the RBI is forecast to keep rates on hold at 5.25 per cent through to end-2020.

Yet despite three interest rate cuts this year and expectations for more, India's growth outlook was downgraded in the latest poll compared to the previous quarterly economic survey in April.

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