Room For Further Rate Cuts To Bolster Economic Growth

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Room For Further Rate Cuts To Bolster Economic Growth
Rajat Mishra - 23 September 2019

“There is room for further interest rate cuts to bolster economic growth given that inflation continues to remain within the central bank’s target,” said Shaktikanta Das, Governor, Reserve Bank of India (RBI).

As the RBI has cut repo rate by 110 basis points (bps) so far. And with impending upcoming policy review meeting in October, there is huge expectation that the RBI will go for a further rate cut.

Das speaking at the Bloomberg India Economic Forum in Mumbai on Thursday said that the government has limited space for any fiscal expansion.

“Today, when we see that the price stability is maintained and inflation is much below 4 per cent and is expected to be so in the next 12 months’ horizon, there’s a room for rate cut especially when growth has slowed down. Within this policy framework the MPC will consider these aspects as well as several other factors including the assessment of growth and inflation projections of our research teams," he said. “I think the government’s fiscal space is itself very limited. The fiscal deficit is at 3.3 per cent. There’s a lot of discussion in media about borrowing by public sector undertakings (PSUs). Both put together there is already you know very little space so far as the fiscal is concerned," Das added.

His comment has come at a time when the domestic growth rate is at lowest in last six years and the consumption has gone down significantly in Indian economy. The RBI has projected GDP growth for the current fiscal at 6.9 per cent—in the range of 5.8-6.6 per cent for the first half of 2019-20 and 7.3-7.5 per cent for the second half. This may be cut further during its October policy review, given the lower-than-expected 5 per cent GDP growth in the June quarter which is the slowest in six years.

Das also said that he expects the US fed’s latest rate cut to boost fund inflows into India through foreign portfolio investment as well as foreign direct investment. The Fed lowered the policy interest rate by 25 basis points to a target range of 1.75-2 per cent.

Talking about the impact of rising crude oil prices on inflation Das said, “This will not have a significant impact on inflation. In August, the monetary policy committee projected CPI inflation at 3.1 per cent for the second quarter of the current financial year and 3.5-3.7 per cent for the second half of the year. The panel also said that inflation is currently projected to remain within the target over a 12-month horizon.”

What would be the RBI’s next course of action? To get the answer, we will have to wait till October.

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