India’s central bank is expected to cut rates
India’s central bank is expected to slash rates after recent data revealed economic growth slowed to a six-year low, yet economists questioned the effectiveness of further rate cuts.
The Reserve Bank of India has already slashed its repo rate — or the rate at which it lends to commercial banks — by 135 basis points since January to boost the economy, making it one of the most aggressive central banks at the moment. The current repo rate is 5.15%.
Still, the cumulative rate cut and “ample surplus liquidity in the banking system” resulted in only a 60-basis-point reduction in lending rates for fresh loans and much lower for all outstanding loans, according to Citi analysts Samiran Chakraborty and Baqar M Zaidi.
“This lack of transmission has raised serious questions about the effectiveness of monetary policy transmission in an environment of acute risk aversion and other structural rigidities but it will be difficult for any central bank to admit that,” they wrote in a note this week.
Economists on average predicted the RBI to cut its repo rate by 25 basis points to 4.90% this week and then by another 15 basis points in the second quarter of 2020, Reuters reported.
A close reading of India’s headline growth number for the three months to September showed public expenditure helped bolster the overall GDP number.
But, the government is running out of room for continued spending to pump up the economy, according to Kunal Kundu, India economist at Societe Generale. Adding to that, “tax revenue collection (is) likely to be rather underwhelming given that nominal GDP growth has dropped to its lowest ever, a worsening of the eventual fiscal deficit remains a distinct possibility,” he said in a recent note.
The budgeted fiscal deficit target at the moment is 3.3% of GDP and if it widens too much, then investor confidence could take a hit. Recently, ratings agency Moody’s downgraded its outlook on India from “stable” to “negative.”
“With the government lacking the fiscal space to pump prime the economy, we think that the RBI’s policy easing stance is likely to continue despite the discernible lack of efficacy,” Kundu wrote, adding that he expects the central bank to reduce rates further by 50 basis points for the full fiscal year, including a 25 basis point cut this week.
