With inflation under control, Raghuram Rajan, the Reserve Bank of India (RBI) governor, cut key interest rates to help kick-start growth in Asia’s third-largest economy.
In its fourth bimonthly monetary policy review for the year, on Sept. 29, the RBI cut the repo rate by 50 basis points to 6.75% from 7.25%. This is the fourth rate cut in the current calendar year. The central bank has earlier cut rates thrice this year.
|Date||Rate cut by||Rate cut to|
|June 2||25 basis points||7.25%|
|March 4||25 basis points||7.50%|
|Jan. 4||25 basis points||7.75%|
A lower repo rate—the rate at which the central bank lends to commercial banks—means lower costs for banks. It also means that this cost saving will be passed on to corporate and individual borrowers, which in turn could bring down the cost burden and stimulate spending.
“The weakening of global activity since our last review suggests that commodity prices will remain contained for a while,” the RBI said in its statement.
“Under these circumstances, monetary policy has to be accommodative to the extent possible, given its inflation goals, while recognising that continuing policy implementation, structural reforms and corporate actions leading to higher productivity will be the primary impetus for sustainable growth,” it said.
“Capacity utilisation is still tepid. Domestic private investment needs to pick up,” Rajan told reporters in a press briefing in Mumbai after the policy was announced.
In August, the consumer price inflation—or retail inflation, as it is commonly known—fell to a new low of 3.66%. This is substantially lower than RBI’s inflation target of 6% to be maintained till January 2016. The focus now is to bring inflation to around 5% by the end of fiscal 2016-17, it said.
The rate cut comes at a time when the government has been lobbying for easing interest rates.
Last week, Arvind Subramanian, India’s chief economic adviser, told Bloomberg in an interview that the monetary policy could now be “flexible” with “inflationary pressures significantly down.”
Finance minister Arun Jaitley has also been prodding the RBI to cut rates. “The RBI historically has been a very responsible institution. Now, as somebody who wants India’s economy to grow and who wants domestic demand to grow, I will want the rates to come down,” Jaitley told reporters in Hong Kong on Sept. 21.
Rajan, however, has been stern about using interest rates as an instrument to push economic growth in the short term.
“We have to have the discipline to stick to our strategy of building the necessary institutions and creating a new path of sustainable growth where jugaad is no longer needed,” Rajan said in a speech on Sept. 18. “For this, we need the understanding and cooperation of business, not impatience and pressure for quick impossible fixes. Only then can we realise our true potential as a nation.”
The latest rate cut, he clarified at the press briefing, wasn’t a result of any pressure from the government or other external factors.
“This rate cut is not a Diwali bonus, it is based on progress on ground,” he told reporters.
“I don’t know what you want to call me. Santa Claus or (a) hawk… My name is Raghuram Rajan and I do what I do.”