RBI vows to ease as ‘long as necessary’ after 5th rate cut

Bloomberg

India’s central bank Governor Shaktikanta Das pledged further monetary policy easing if needed after reducing interest rates for a fifth time to boost a flailing economy.
The Reserve Bank of India (RBI) lowered its benchmark repurchase rate by 25 basis points to 5.15 percent, in line with the forecasts of a majority of economists surveyed by Bloomberg. Echoing Mario Draghi’s “whatever it takes” sentiment,
Das said policy makers will “continue with the accommodative stance as long as it is necessary to revive growth while ensuring inflation remains within the target.”
Growth in the consumption-driven economy has taken a beating amid rising unemployment and ongoing stress in the banking system, contributing to a collapse in demand for everything from 7-cent cookies to cars. The RBIlowered its full-year growth forecast to 6.1 percent — which would be a seven-year low — from 6.9 percent previously.
“There is policy space to address growth concerns,” Das said. He last month alluded to the chance of more easing, given concerns about economic growth.
Central banks around the world are loosening monetary policy to offset a global slowdown made worse by US-China trade tensions. Australia cut rates earlier this week for the third time this year, while the Philippines and Indonesia eased policy last month.
The rate cut was a unanimous decision by all six members of the Monetary Policy Committee, although one member voted for a steeper40 basis-point easing.
It takes the repurchase rate to the lowest in almost a decade and reduces the inflation-adjusted real rate below 2 percent. Like other emerging markets, the RBI needs to keep the rate attractive enough to lure foreign funds into the country to finance its current-account and budget deficits.
After an unconventional 35 basis-point move in August, the RBI reverted to a 25-point reduction, disappointing bond investors who had expected a more aggressive reduction.
The benchmark stock index and the rupee fell, reversing early gains, while yields on India’s 10-year bonds jumped 4 basis points to 6.65 percent.
The market reaction reflects “over-exuberance about bigger rate cuts getting dented,” said Naveen Singh, head of fixed-income trading at ICICI Securities Primary Dealership in Mumbai. There’s also some disappointment that the governor himself voted for just a 25 basis-point cut, he said.
The government’s recent fiscal measures, including a $20 billion tax break for companies, have given the RBI room to shift to a more gradual pace of easing again.
Das said the measures announced by the government over the last two months are expected to revive sentiment and spur domestic demand, especially private consumption.
“The Reserve Bank of India’s baby-step rate cut of 25 basis points isn’t enough to reverse a severe slump in the economy. The sharp downgrade of its full-year growth outlook shows
it recognises the extent of the challenges,” said Abhishek Gupta, India economist for Bloomberg.