A drop in inflation rates has allowed the Reserve Bank of India (RBI) to cut interest rates on 2 June for the third time this year and provide help to a toiling economy.
A rate cut go along with steps to boost liquidity, said bankers and according to bankers tight cash conditions prevent them from lowering lending rates. Since India is the fastest-growing economy in the world, economists say the data is not keeping steady with other indicators, which show a limp economy.
Thirty-five of 48 economists expected RBI Governor Raghuram Rajan to cut the repo lending rate by a quarter percentage point to 7.25% after lowering it by the same amount in January and again in March, while three expected a 50 basis point cut.
Since RBI held the rates steady at its last policy review in April, consumer price inflation has eased to a four-month low of 4.87%, in line with the central bank’s mid-term targets. Even retail prices are on the downswing.
The industry and bankers take comfort the government has been able to rein in fiscal deficit within 4 percent of GDP in 2014-15, providing headroom for RBI to soften up.
The RBI has made rate cuts dependant on government action to deliver reforms, such as fixing India’s infrastructure. There is uncertainty now with Modi government struggling to pass measures through Parliament.
Rajan said that banks have yet to substantially cut their lending rates thereby disrupting monetary policy transmission.
Further rate cuts would put India in a similar monetary path to China, which earlier this month cut interest rates for the third time in six months.