Mumbai: The Reserve Bank of India cut interest rates for the third time this year and downplayed recent growth in Asia's third-largest economy, saying investment remained weak. The Reserve Bank of India (RBI) lowered the benchmark repo rate - the level at which it lends to commercial banks, by 25 basis points to 7.25 per cent with immediate effect. It was in line with analysts' expectations and means the RBI has now lopped 75 basis points from borrowing rates in 2015. RBI governor Raghuram Rajan said the cut was necessary to boost investment and consumer demand in the economy, which he said was still not firing on all cylinders despite growth picking up pace.
"We still believe the economy is below potential. Investment is still tepid and demand is weak," he told reporters after the bank's monetary policy meeting in Mumbai. Prime Minister Narendra Modi's right-wing government swept to power last year pledging to reform and revive a flagging economy, and has been keen for the RBI to lower interest rates. It received a major boost on Friday when data showed that India's economy grew 7.5 percent in the first three months of the year, overtaking China.
The government posted annual growth of 7.3 percent for 2014-15, up from 6.8 per cent the previous year, but Rajan suggested firm evidence of an economic recovery was far from clear. "With low domestic capacity utilisation, still mixed indicators of recovery, and subdued investment and credit growth, there is a case for a cut in the policy rate today," he wrote in the statement.
He later added: "This policy stance is neither conservative nor aggressive. It is just appropriate given the conditions. We have acted as much as what (the) data allowed us to do." The RBI announced its first easing in 20 months in January, snipping 25 basis points off the repo rate. It then made a surprise cut in March before keeping the rate unchanged in April, citing inflation concerns and a failure of most commercial banks to implement reduced loan rates.
"Banks should pass through the sequence of rate cuts into lending rates," Rajan reiterated on Tuesday. The governor has made controlling inflation a priority, setting a target of bringing it consistently below six percent by January next year and to four percent for the 2016/17 financial year. In April, consumer inflation fell to a four-month low of 4.87 percent, well within the RBI's target range. With the monsoon due to start imminently, and forecast to be weaker than usual, the RBI took the unusual step of urging the government to ensure there were adequate food supplies to keep prices under check.
"Strong food policy and management will be important to help keep inflation and inflationary expectations contained over the near term," the RBI said in its statement. Monsoon rains are vital for Indian crops and a particularly dry season can reduce farm output, raising food prices which can be crippling for the tens of millions of India's poor.
"How the monsoon emerges in coming months is the biggest uncertainty right now," Rajan said. Ashutosh Datar, said an economist at IIFL Institutional Equities. "As expected they are being cautious on inflation due to the monsoon. I'm not surprised by today's announcement."
