India's New Central Bank Head Delivers 'Election Cut' for Modi
India's New Central Bank Chief Delivers Surprise Rate Cut
(Bloomberg) -- India’s new central bank chief delivered an unexpected interest rate cut, providing Prime Minister Narendra Modi with the kind of stimulus he needs to stoke economic growth in an election year.
In a sharp reversal from October, when the Reserve Bank of India took rate cuts off the table, Governor Shaktikanta Das -- who took office in December -- opened the door to more policy easing and brought growth back into the Monetary Policy Committee’s focus. That was a departure from his predecessor Urjit Patel, whose singular aim was to meet the RBI’s 4 percent inflation mandate.
The cut came almost a week after Modi’s administration unveiled an expansionary budget, which included $13 billion of help for consumers ahead of the poll that’s due by May, and days after an adviser to the prime minister said the RBI should ease policy.
Das, a career bureaucrat, was appointed shortly after Patel resigned as governor amid a heated public battle with the state, which led to questions about the central bank’s independence from politics. Modi’s government has been pushing the RBI to transfer more of its excess capital to the state as well ease lending restrictions on banks to spur growth.
Government officials were quick to praise the RBI’s move, while economists were more cautious, concerned that the monetary and fiscal stimulus would be inflationary.
“A very balanced and pragmatic policy statement,” Economic Affairs Secretary Subhash Garg said after the rate move. It “underlines low inflation and high growth path for India for 2019-20.”
Das pointed to a sharp a slowdown in inflation as justification for the 25 basis-point reduction, taking the repurchase rate to 6.25 percent. The MPC also reversed its policy stance to neutral from ‘calibrated tightening’ adopted in October.
“Das has delivered what the Modi government was hoping for,” said Mark Williams, chief Asia economist at Capital Economics Ltd. in London. While this “pre-election rate cut” might boost growth, the longer-term concerns for investors will be about the RBI’s credibility as an inflation fighter, he added.
The U.S. Federal Reserve’s shift to a more dovish stance has helped, giving emerging markets like India a reprieve after last year’s rate hikes. Central banks in the Philippines and Thailand also held rates steady this week.
Developed economies too are altering stance, with the Reserve Bank of Australia governor this week shifting to neutral.
Act Decisively
Das, who was one of four MPC members who voted for a cut on Thursday, reiterated his commitment to supporting growth.
“It is vital to act decisively and in a timely manner to address the objective of growth once price stability as defined in the Act is achieved,” Das told reporters in Mumbai. “The shift in stance from calibrated tightening to neutral provides flexibility to address, and the room to address, sustained growth of India’s economy over the coming months as long as inflation remains benign.”
Inflation slowed to an 18-month low of 2.2 percent in December, remaining well below the RBI’s medium-term target, and not expected to breach that goal in the next 10 months, according to the central bank’s latest forecast.
Thursday’s move was the first rate cut since August 2017. The decision was predicted by just 11 of 43 economists surveyed by Bloomberg News, with the rest expecting no change.
What Our Economists Say...The decision “restores growth maximization as a secondary objective of the RBI. It also signals a commitment to a symmetric policy to achieve its 4% inflation target -- a departure from the RBI’s previous one-sided, conservative stance that aimed to keep inflation below the target.”-- Abhishek Gupta, Bloomberg Economics Read More: RBI Cuts, Drops Hawkish Bias - Now Data-Driven |
Since taking office Dec. 12, Das has eased banks’ asset recognition norms for medium and small scale enterprises, removed lending curbs on three weak state-run banks and has agreed to consider payment of an interim dividend to the government.
Sonal Varma, chief India economist at Nomura Holdings Inc. in Singapore, said the RBI’s autonomy wasn’t at issue this time around.
“Every monetary policy committee member can and should have an independent view,” she said. “But there should be consistency in views over a period of time. The surprise this time was existing monetary policy committee members who voted for calibrated tightening stance in December and a cut in February.”
--With assistance from Michelle Jamrisko and Manish Modi.
To contact the reporters on this story: Anirban Nag in Mumbai at anag8@bloomberg.net;Rahul Satija in Mumbai at rsatija1@bloomberg.net;Vrishti Beniwal in New Delhi at vbeniwal1@bloomberg.net
To contact the editors responsible for this story: Nasreen Seria at nseria@bloomberg.net, Karthikeyan Sundaram
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