RBI Cuts Rate for the Fifth Time

Stockholm (Ekonamik) – At this week’s meeting of the Reserve Bank of India (RBI) the five members of the Monetary Policy Committee (MPC) unanimously voted to cut interest rates by 25bps to 5.15%. This is the fifth rate cut decision by the RBI in 2019.

International Motivations of the RBI

The RBI cited domestic as well as international motivations for its decision. Internationally it noted that “the global economy has lost further momentum since the August 2019 meeting of the MPC, with trade and geopolitical tensions purveying heightened uncertainty.”

The problem was noticeable in both developed and emerging markets. “Among advanced economies (AEs), the slowdown in the second quarter of calendar 2019 appears to have extended into the third quarter as well. For emerging market economies (EMEs), the worsening global economic and trade environment is weighing upon their macroeconomic performance.”

Domestic Motivations of the RBI

Domestically, the central bank was concerned about real GDP dropping to 5% in the first quarter, a development it characterised as a “slump”. On the production side, the RBI noted that “industrial production was lower in July 2019 on a year-on-year basis, pulled down mainly by manufacturing. The production of capital goods and consumer durables contracted. The output of eight core industries contracted in August, with the production of coal, electricity, crude oil and cement decelerating or going into contraction. The manufacturing PMI for September 2019 was flat, though still in the expansion zone. High frequency indicators suggest that services sector activity weakened in July-August. Indicators of rural and urban demand continued to slow down in July-August.” This contraction appears to be matched by increasingly pessimistic consumers according to the RBI’s own consumer confidence index.

Further Cuts Expected

“Further rate cuts are likely even though their efficacy is questionable,” commented Dr. Kanti Ghosh, Group Chief Economic Adviser at State Bank of India.

“Even though the RBI has clearly emphasized more rate cuts, the efficacy of such is questionable against an elevated household leverage, deteriorating company fundamentals (upgrade to downgrade ratio has now halved) and significantly weak demand,” the Economic Adviser added.

Other Central Bank Meetings

Among other central banks meeting this week, the ones in Angola, Jamaica, Poland and Romania left their rates unchanged, while the ones in Australia and Iceland lowered their rates, to 0.75%% and 3.25% respectively.

Image courtesy of RBI


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