India's central bank cuts rates to spur growth

India’s central bank cut its main interest rates by 50 basis points; its first reduction in three years.

By (AFP)

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Published: Tue 17 Apr 2012, 1:39 PM

Last updated: Tue 7 Apr 2015, 12:15 PM

The Reserve Bank of India (RBI) said the benchmark repo rate, at which it lends to commercial banks, would fall to 8.0 percent and the reverse repo rate, which it pays banks for deposits, would fall to 7.0 percent.

“The reduction in the repo rate is based on an assessment of growth having slowed below its post-crisis trend rate,” the RBI governor Duvvuri Subbarao said.

The central bank had hiked interest rates 13 times from March 2010, undertaking the most aggressive monetary policy tightening drive of all major economies. Rates have been on hold since December last year.

The stock markets cheered the rate cut, with the benchmark 30-share Sensex index comprising blue-chips up 0.72 percent at 17,274.54 points.

The index then retraced marginally to 17,231.88, but was still up 0.55 percent at midday.

The bank’s decision comes as India’s inflation climbed unexpectedly in March, data showed on Monday, fuelled by rises in food and fuel prices.

Business leaders had been clamouring for interest rates to be reduced to boost the economy, expected by the government to grow 6.9 percent in the financial year just ended, its slowest pace since the 2008 financial crisis.

Industry heads welcomed the sharper-than-expected cut.

“The repo rate cut will provide the boost to investment as well as send a strong signal that turning around growth is of pivotal importance,” said Chandrajit Banerjee, director general, Confederation of Indian Industry.

Rupa Rege Nitsure, chief economist with the state-run Bank of Baroda, said the “prudent policy” would create pressure for the banks to lower their rates.

“This is like a hormone injection to improve the feel-good factor,” she told AFP.

Emerging market nations have been cutting rates to bolster expansion and shield their economies from Europe’s sovereign debt crisis as well as the weakened US economy and to offset a slowdown in China.

In a preliminary step to loosen monetary policy, the RBI has twice reduced since the start of 2012 the amount of cash commercial banks must keep in reserve in a bid to boost lending and spur growth.

Subbarao forecast India’s GDP growth in the new financial year, which started April 1, at 7.3 percent, slightly below the government’s estimate of 7.6 percent.

This is still far below the eight-to-nine percent growth for much of the past decade.

India’s slowing growth comes as the Congress party-led government, battered by a string of graft scandals, has been under heavy financial market pressure to curb public spending and rein in a ballooning deficit.

Subbarao said that inflation, though on a downtrend, remains “challenging”.

India’s government is expected to raise fuel prices once again in coming months, which could raise inflationary pressures.

India’s projected growth remains enviable by Western standards but it is too slow to fulfill government pledges of significant poverty reduction and to create enough jobs for a soaring young workforce in the country of 1.2 billion.