The Bank of India’s Monetary Policy Committee (MPC) cut the country’s key interest rate from 6.00% to 5.75%, the third consecutive rate cut for the year. The central bank also changed its policy stance from “neutral” to “loose”, which is also a defensive measure taken by the central bank of India to defend against global trade disputes.
In addition, the Bank of India will reduce its GDP growth forecast for 2020 to 7% from 7.2%; the GDP growth forecast for the first half of 2020 will be lowered from 6.8% to 7.1% to 6.4% to 6.7%; the second half of 2020 will be GDP. Growth is expected to be revised from 7.3% to 7.4% to 7.2% to 7.5%.
MPC pointed out that India’s economic growth momentum has been significantly weakened. Compared with the policy meeting in April 2019, India’s output gap has been further expanded; domestic investment activities have weakened, and overall demand has been somewhat slowed by exports. The drag on private consumption continues to slow down.
MPC also added that the risks surrounding the baseline inflation trajectory come from uncertainty related to the monsoon, non-seasonal rise in vegetable prices, international fuel prices and their transmission to domestic prices, geopolitical tensions, financial market volatility and fiscal prospects.
“The Bank of India has lowered the repo rate by 25 basis points as expected, but it is a bit surprising that the policy position has changed to ‘relaxed’. The bond market will see this as a major positive move, although most of the rate cut cycle may have ended. The tone of India’s central bank policy is moderate, highlighting concerns about growth. Considering the good inflation trajectory and growing concerns about economic growth, we continue to call on the Bank of India to cut interest rates by another 25 basis points in August. However, the transmission of interest rate cuts It will be key, the Bank of India should be committed to maintaining liquidity in the coming months, at least to remain neutral,” said Suvodiep Rakstro, senior economist at Kutak Institutional Securities.
In the last fiscal year of March, India’s economic growth slowed to 6.8%, the lowest level in five years. The month-on-year growth rate was 5.8%, the lowest level since June 2014. The rate cut by the Bank of India is also in line with analysts and economists’ expectations, many of whom have focused on India’s moderate inflation – India’s Consumer Price Index (CPI) in February. The underlying overall inflation rose, but remained at 2.57%, lower than the 4% target of the Bank of India.
However, there is currently no guarantee that the third rate cut in the year will have any positive effect on the Indian economy. The CARE rating pointed out that other factors will also drag down the Indian economy. For example, the monsoon season may once again cause serious damage to farmers and the two cities in different parts of India, trade disputes may bring further negative impacts and so on.