The Reserve Bank of India surprisingly cut rates by half a point
Markets had expected a reduction of 25 basis points. Credit institutions' cash reserve ratio also reduced by one percentage point
3' min read
3' min read
From our correspondent
NEW DELHI - In a surprise move that is clearly aimed at supporting growth amid heightened global uncertainty, the Reserve Bank of India (RBI) yesterday cut its benchmark interest rate by 50 basis points, instead of the expected 25. This is the third consecutive cut since the beginning of the year and the effect on available liquidity in the system is set to be amplified by a reduction in the cash reserve ratio, the reserve requirement ratio for banks. The Monetary Policy Committee of the RBI cut the repurchase (or repo) rate to 5.50 per cent, bringing the overall reduction in the cost of money from February to date to 100 basis points. The cash reserve ratio was lowered by 100 basis points to 3 per cent, freeing up bank liquidity of 2.5 trillion rupees, equivalent to about USD 29 billion.
The half-point rate cut had been predicted by Soumya Kanti Ghosh, group chief economic advisor at State Bank of India, the only one of the 34 economists surveyed by Bloomberg to point to such a massive reduction. According to Ghosh, the decision to make a 50-point cut now, rather than two 25-point cuts a few months apart, will serve to 'offset the prevailing climate of uncertainty, which is the watchword right now' in the markets. According to Ghosh, there may be scope for a further 25 basis point cut in the coming months, 'but we are at the limit'.
Not least because at the same time, the central bank revised its monetary policy stance from accomodative to neutral, suggesting that further rate cuts are by no means a foregone conclusion in the short term, and if there are they will only be dictated by a perceptible change in macroeconomic conditions. "The RBI has moved up the timetable and wants banks to react now," explains Venkatakrishnan Srinivasan, managing partner at financial advisory firm Rockfort Fincap. "By changing the stance, I think they are trying to indicate that there will be no further rate cuts in the immediate term," so as to reduce the expectations of those who might be tempted to wait for further easing.
The sequence of cuts in these first months of the year marks a strong discontinuity between the RBI of the current governor Sanjay Malhotra, a former Finance Ministry official considered close to government positions, and his predecessor Shaktikanta Das whose mandate at the helm of the central bank was, somewhat surprisingly, not renewed last December. The rate cut comes after the Indian economy grew by 6.5 per cent in the fiscal year ending 31 March, a high rate, but not enough to achieve the government's goal of making the country a developed economy by the 100th anniversary of independence in 2047. Analysts expect that the cut decided yesterday will not only bring stock market indices back to their highs of a few months ago, but will also contribute to the revival of the real estate and automotive sectors. "The Indian economy," Malhotra said at a press conference yesterday, "presents a picture of strength, stability and opportunity," emphasising that the country aspires to grow "at an even higher pace".
