India's central bank cut its benchmark interest rate for the fifth time in a year on Friday as it continues unanimous pressure to revive a stagnant economy.
The Reserve Bank of India (RBI) lowered its repo rate by 25 basis points to 5.15% with five members of its Monetary Policy Committee voting, against one that supported a 40 basis point cut.
The decision came on the back of weaker growth, a resurgence of financial stability risk and a surprising fiscal stimulus in the form of a recent decline in corporate tax.
However, more aggressive political moves are expected, with the economy deteriorating for five consecutive quarters, and last hit a six-year low of 5% in the second quarter of 201
The cut was more conservative than many market participants expected, but came accompanied by dovish guidance, with growth forecasts revised sharply lower and inflation forecasts still good.
Consumer Price Inflation stands at 3.2%, against the RBI's midpoint target of 4%. RBI's inflation forecasts on Friday were largely unchanged.
India's BSE Sensex index closed the session 433 points lower on Friday following a reduction of the 2020 GDP growth target from 6.9% to 6.1%. The broader Nifty50 index shed 139 points, leaving both indices up 3% during the week.
Limited fiscal space
In a note Friday, ANZ chief economist for Southeast Asia and India, Sanjay Mathur, emphasized that RBI Governor Shaktikanta Das kept the policy area open to meet growth problems by strengthening domestic demand, and retained domestic demand. at another 50 basis points in cuts from here on out.
Das has said that the government has limited fiscal space to provide growth stimulus, but Finance Minister Nirmala Sitharaman then announced a significant cut in corporate tax last month which she estimates will lead to 1.45 trillion rupees ($ 20.4 billion) ) in lost revenue.
While the MPC's statement on Friday did not raise fears of fiscal slippages as a result of the tax cut, Das said that it will so far take the government's promise to meet fiscal deficit for 2020 as a given.
"In that case, the RBI's decision to deliver am Powerful cut of 25 basis points suggests that it is trying to balance growth problems against limited remaining monetary policy space and a reduced efficiency of monetary policy to boost growth (hence the growing role of fiscal policy)," Nomura Chief India Economist Sonal Varma i Contrary to the ANZ projections, Varma expects that with 135 basis points in interest rates already delivered and marginal returns from each cut declining, the relief cycle is near the end, with a final 15 basis point cut expected in December.
A number of factors have contributed to India's economic downturn, but the fragility of the banking system is often cited as a major contributor.
Nomura analysts suggested that given the weaker growth than expected, a "front-loaded" political action would be the right approach, allowing banks to sharply reduce lending rates ahead of the holidays 1.
The RBI has mandated hate banks to link interest rates to an external benchmark, such as the central bank's repo rate.
"One possible reason for this limitation is the health of India's banking and financial sectors, which are still weak," said Shumita Deveshwar, Director of India Research at TS Lombard.
"A shrinking savings rate and a large public sector borrowing need keep borrowing costs for banks elevated, and many banks are still dealing with relatively large amounts of bad debt on their books."
Branches of State Bank Of India, Syndicate Bank and Canara Bank of New Delhi, India.
Pradeep Gaur | Mint | Getty Images
Banking problems have led to a credit downturn that has exacerbated the major financial headwinds, Deveshwar said in a statement Monday.
"Underreporting of bad loans is apparently still a risk despite RBI's actions in recent years to make banks' balance sheets more transparent and to stop ever-greening loans," she added.
According to Reserve Bank of India data, non-transferable assets to banks in India have risen from 2.63 trillion rupees ($ 39.96 billion) from March 2014 to 10.39 trillion rupees ($ 146 billion) per March 2018. The State Bank of India, the country's largest state-owned lender, alone accounted for nearly 2.23 trillion rupees of bad loans in 2018.