RBI cuts lending rate to spur growth, lowers GDP outlook for this year to 6.1%
The Reserve Bank of India on Friday lowered the GDP outlook for the current financial year to 6.1 per cent from 6.9 per cent projected in August, noting the risks to growth have emerged due to weak domestic demand and sagging export prospects on account of continuing trade tensions.
The RBI monetary policy committee, which has reduced the rate at which the RBI lends money to commercial banks to 5.15 per cent, said recent measures announced by the government were likely to help strengthen private consumption and spur private investment activity.
But it underscored that “intensified efforts” will still be required to restore the growth momentum. The committee noted that the impact of monetary policy easing since February 2019 was gradually expected to feed into the real economy and boost demand.
Friday’s cut takes the benchmark lending rate to the lowest in almost a decade and follows a number of fiscal steps taken by the government recently to spur growth, including a surprise reduction in corporate taxes.
Watch: RBI cuts repo rate by 25 basis points, fifth cut in this year
Gross domestic product rose 5 per cent in the quarter ended June, the weakest pace in six years.
Leading indicators tracked by Bloomberg News suggest fairly subdued investment and consumption activity in August.
The economy expanded by just 5% 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.
Markets were little changed after the RBI announcement as the central bank’s decision was largely in-line with expectations.
The broader NSE Index, which was up 0.60% before the policy decision, pared those gains after the rate cut and were last up 0.06%. The 10-year benchmark bond yield rose to 6.64% from 6.59% before the announcement, while the rupee was largely flat at 70.83 per dollar.
Analysts said more rate cuts could be on the cards in December as officials try to ramp up rural consumption and economic activity. “Demand in India is abysmally low and GST (goods and services tax) returns were at an 18-month-low in August, reflecting muted consumption demand,” Garima Kapoor, economist at Elara Capital told news agency AFP.
“RBI has room for rate cuts in the range of 15-30 basis points in December as per benign inflation dynamics”, she added.