India’s central bank will pressure commercial lenders to pass on its latest cut in benchmark interest rates, amid concerns that weak liquidity in the financial sector is holding back economic growth.
The Reserve Bank of India (RBI) trimmed rates by 25 basis points to 6% on Thursday, matching its reduction in February, but high costs of raising capital — mostly due to a mismatch between deposits and credit growth — have made banks reluctant to deliver the full benefits to consumers.
Announcing the cut a week before the general election gets underway, new RBI Governor Shaktikanta Das said further consultations would be held with stakeholders to ensure rates were lowered, following similar talks in February. Most banks passed on only 10 basis points of the February reduction, with some, like the State Bank of India, making a token cut of five basis points on home loans but keeping the marginal cost-based lending rate (MCLR) intact.
Since the start of the year, banks have been offering overnight lending rates as high as 8.55%, dissuading businesses from borrowing money until the current political uncertainty eases.
Das said the RBI would will use all available monetary instruments to inject cash into the banking system, including open-market bond purchases and foreign currency swap auctions. This follows a sharp slowdown in economic growth in the final quarter of 2018.
Growth forecast lowered
The RBI Monetary Policy Committee lowered its economic growth forecast for the fiscal year that started on April 1 from 7.4% to 7.2% due to weakening investment activity. GDP growth has been projected in the range of 6.8-7.1% in the first half of 2019-20 and 7.3-7.4% in the second half.
Production and imports of capital goods both slowed in the three months to the end of March, and the committee said that weakening global demand might hurt India’s exports. Domestic consumption is also lagging, focusing attention on the liquidity issue. The RBI retained a neutral monetary stance, fueling speculation that it may cut rates at least one more time this year.
Falling prices have given the RBI more wriggle room on rates. Inflation of 2.9-3% is forecast in the April-September quarter, down from 3.2-3.4% in the previous three months.
Das, who was appointed in December, has taken a more aggressive monetary stance than his predecessor Urjit Patel, with the two rate reductions reversing an increase of 50 basis points by his predecessor in 2018. He also eased curbs on lending to weak banks that were imposed by Patel.
The growth slowdown is a setback for Prime Minister Narendra Modi, who is seeking a second term in office. The election will be held from April 11 in seven phases.