India cuts rates, RBI aims to boost investment

Bloomberg

India cut interest rates to the lowest since 2010 to boost an economy struggling to recover from Prime Minister Narendra Modi’s cash clampdown.
The benchmark repurchase rate was lowered to 6 percent from 6.25 percent, the Reserve Bank of India said in a statement in Mumbai on Wednesday. The move was predicted by 41 of 57 economists in a Bloomberg survey with the rest seeing no change. It retained its neutral policy stance.
Five of the six-member monetary policy committee voted for a cut and called on the government to speed up projects as there’s an “urgent need” to boost private investment. The reduction may be Governor Urjit Patel’s last chance to spur growth before the US Federal Reserve begins reducing its balance sheet, adding pressure on emerging markets to tighten.
“Some of the upside risks to inflation have either reduced or not materialised,” the central bank said. “Consequently, some space has opened up for monetary policy accommodation, given the dynamics of the output gap.”

Key points
Reiterates projection of April-September inflation at 2 percent to 3.5 percent, rising to 3.5 percent to 4.5 percent over the next six months Retains forecast that gross value added will grow 7.3 percent in the year through March “While inflation has fallen to a historic low, a conclusive segregation of transitory and structural factors driving the disinflation is still elusiv”. “There is an urgent need to reinvigorate private investment,” which depends largely on state governments doing their bit to speed up projects.
The yield on Indian government notes due May 2027 rose one basis point to 6.45 percent, according to prices from the RBI’s trading system. The rupee extended gains, rising 0.5 percent to 63.79 per dollar. The benchmark stock index fell.
“Further rate cuts will be data dependent,” said Sujan Hajra, chief economist at Anand Rathi Financial Services Ltd. in Mumbai. “If inflation continues to remain modest, another rate cut is possible by December end.”

Paradigm Shift
The move follows comments from Modi’s top economic adviser Arvind Subramanian, who said last month that India was undergoing a “paradigm shift” in prices and urged policy makers to reflect “very, very, carefully” upon June’s record low inflation and soft industrial output.
Consumer prices rose 1.5 percent in June and will end 2017 around the RBI’s medium-term inflation target of 4 percent, according to the median estimate in a Bloomberg survey. Private economists have also lowered their growth projections for the previous quarter as loan-growth hovers near a record low and job losses mount after Modi last year surprisingly scrapped 86 percent of currency in circulation.
India’s policy rate will stay at 6 percent at least through the
end of 2018, according to a Bloomberg survey of economists published late last month. It predicts gross domestic product will grow 6.9 percent April to June instead of the 7 percent estimated earlier. Analysts had been wrong footed for the previous quarter when the economy expanded 6.1 percent rather than the 7.1 percent projected pace. While these seem to be robust rates of growth, they’re not enough to create jobs for the million Indians who enter the workforce each month.
So far the risks of jobless growth have been papered over by stronger financial markets, with India’s stocks, bonds and rupee among the world’s best performers this year. However credit growth continues to hover near record lows, Indian factories are running at less than 73 percent of their capacity and bad loans at Indian banks are forecast to rise from a 15-year high.
State Bank of India, the country’s largest lender, on Monday lowered rates for most depositors and said it took the move to avoid raising lending rates. It attributed the cut in deposit rates to rising real rates, which are funding costs adjusted for inflation.
At a briefing after the RBI decision, Patel said liquidity in the banking system and policy rate reductions by the central bank give commercial lenders scope to lower lending rates.

Bonds in India remain steady after central bank cuts rates
Bloomberg

Indian sovereign bonds traded little changed after a central bank panel cut interest rates as expected while maintaining its neutral policy stance. The rupee extended gains.
The monetary policy committee led by Reserve Bank of India Governor Urjit Patel lowered the benchmark repurchase rate by 25 basis points to 6 percent, according to a central bank statement in Mumbai on Wednesday. The move was predicted by 41 of 57 economists surveyed by Bloomberg, while the rest forecast no change. Five of the six RBI panel members voted for a cut.
“The only surprise to me is no surprise in the policy,” said Vivek Rajpal, a Singapore-based rates strategist at Nomura Holdings. “I continue to see value in sticking with front-end bonds, which should perform well. A big reaction in the longer end shouldn’t be expected as the outcome is broadly in line with expectation.”
The yield on government notes due May 2027 was little changed at 6.44 percent in Mumbai, after rising to as high as 6.48 percent immediately after the policy decision. The rupee rose as much as 0.6 percent to 63.7125 per dollar, its strongest level since July 2015.
This year’s first reduction in borrowing costs comes after gains in India’s consumer prices slowed to a record 1.54 percent in June and gross domestic product expanded by 6.1 percent in the January to March quarter.