A rate-cut hattrick: is it enough?

For the third time in four months, the Reserve Bank of India has cut interest rates by 25 basis points, setting the repo rate at a nine-year low of 5.75%. The Monetary Policy Committee, headed by RBI Governor Shaktikanta Das, has unanimously voted for a cut in interest rate. In effect, the RBI has shifted its focus from managing inflation, which is well within the target of 4%, to bolstering sagging economic growth. Given that retail inflation is at 2.9%, the central bank seems to have moved carefully to fuel consumption-led growth. But cheaper funds will be available for companies and consumers only when banks transmit the three rate cuts announced by the RBI. Governor Das conceded that only a modest 21 basis points out of the 50 basis points rate cut in February and April have been transmitted to end-customers. The expectation is that banks will transmit the remaining 54 basis points, including the latest cut of 25 basis points, in the next three months. Though core inflation has been firming up slowly and vegetable prices shot up during the summer, inflation continues to be benign given that international crude oil prices ranged below $50 a barrel over the last few weeks.

Slowing economic impulses were evident after GDP growth fell to 5.8% in the January-March quarter, the lowest in 20 quarters. In fact, this has now forced the government to set up two cabinet committees, headed by Prime Minister Modi, to deal with key issues like jobs, growth and slowing investments. Even the RBI pointed to the sharp decline in investments and private consumption. Gross fixed capital formation, a measure of investment activity, dipped to a low of 3.6% in the last quarter, thereby pushing RBI to cut rates. Automobile and real estate sales have hit a nadir; the Nikkei Purchase Managers’ Index (PMI) for services has fallen to a 12-month low.

Over and above the domestic troubles, the trade war triggered by the US with most of its partners, including India, has contributed to a global slowdown, hitting exports from most emerging markets. The RBI seems to have factored in these issues while slashing growth estimates to 7% from the earlier 7.2% for this fiscal. The gloomy global scenario is expected to cast its shadow on India over the next few quarters. This seems to have led the RBI to roll out the ‘accommodative’ policy stance that opens up scope for more rate cuts over the next few months. While the RBI seems to be doing its bit to support growth and jobs, Finance Minister Nirmala Sitharaman’s first budget, to be presented on July 5, will define the course for the rest of the fiscal year and beyond.