Thursday 3 August 2017

RBI Placates With A Rate Cut, Over To PM Modi

RBI Placates With A Rate Cut, Over To PM Modi

After months of government pressure to cut interest rates, central bank RBI delivered on Wednesday, putting the onus back on Prime Minister Narendra Modi to spur growth.
The Reserve Bank of India lowered its benchmark repurchase rate to 6 percent from 6.25 percent, as widely expected, and called on local administrations to speed up projects because there’s “an urgent need” to boost private investment. Given that PM Modi’s party the BJP controls 18 of the country’s 29 states after a surprise political maneuver last week, focus is now on the government to push through complicated labor and land reforms.
“Monetary policy can do only so much for the economy,” said Sujan Hajra, chief economist at Anand Rathi Financial Services Ltd. in Mumbai. “The bigger chunk of providing stimulus lies with the government.”
Here’s PM Modi’s dilemma: India’s economy is chugging along at a world-beating pace but underlying slack at factories and anemic loan growth could slow expansion before he faces reelection in 2019. His government has limited room to increase spending because it runs a bloated deficit, and scope for monetary easing may close when the Federal Reserve starts reducing its balance sheet.
That means he needs to rally his state allies — representing 60 percent of gross domestic product — to make it easier for companies to acquire land and hire and fire workers.
A clutch of data released by the RBI late Wednesday shows how urgent it is to get the policy mix right. Factories were running at about 74 percent of capacity October-December, business sentiment in manufacturing worsened April-June, consumer confidence dipped into the “pessimistic zone” in June, and more households expect prices to rise over the next three months after a record-low 1.5 percent reading in June.
Just like other central banks, the RBI too was caught out with inflation coming in much lower than its forecast. It projects 2 percent to 3.5 percent April-September and 3.5 percent to 4.5 percent over the next six months, but said “a conclusive segregation of transitory and structural factors driving the disinflation is still elusive.”
The June reading seemed to have rattled the government, with PM Modi’s top economic adviser Arvind Subramanian calling on policy makers to take a long hard look at a raft of soft data. The government on Wednesday welcomed the rate reduction.
“We welcome the 25 basis points cut in the repo rate as an important step necessary to converge towards the appropriate real monetary conditions for sustained growth consistent with India’s potential and for stable, moderate inflation,” Economic Affairs Secretary Subhash Chandra Garg said in a statement.
Skeptical Economists

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