India cuts key rate as inflation eases

India Dispatch: India yesterday cut its key interest rate for the first time in nine months, a move that it is hoped will help boost economic growth in the country.

A store in Zirakpur, Punjab. Inflation has fallen in India, prompting an interest-rate cut and hopes of a boost to economic growth. Sanjit Das / Bloomberg News

India cut its key interest rate yesterday for the first time in nine months, a move that it hoped would help to boost economic growth.

There has been mounting pressure from the government and industry in recent months for the Reserve Bank of India (RBI) to reduce the cost of borrowing. Signs of easing inflation combined with serious concerns about slowing growth prompted it to lower the benchmark interest rate to 7.75 per cent from 8 per cent.

"Growth has decelerated significantly below trend through the last fiscal year and through this year so far, and overall economic activity remains subdued," said Duvvuri Subbarao, the governor of the RBI. "On the demand side, investment activity has been way below desired levels and consumption demand, too, has started to decelerate. External demand has also weakened due to languid global growth."

Soaring inflation meant the central bank kept rates on hold for most of last year. India's wholesale price index inflation eased to 7.18 per cent last month, compared with 7.24 per cent in November.

"Several indicators, such as the weaker pricing power of corporates, excess capacity in some sectors, the possibility of international commodity prices stabilising as well as inflation momentum measures, suggest that inflationary pressures have peaked," said Mr Subbarao.

But the bank also warned that inflation remained a concern.

"RBI cut with caution," said Leif Eskesen, HSBC's chief economist for India and Asean. "It sounded a cautionary tone on inflation and in its forward guidance noted that the room for further easing is 'limited' and contingent on inflation risks receding further and the twin deficits narrowing.

The RBI also reduced the cash reserve ratio for banks yesterday to 4 per cent from 4.25 per cent, injecting about 180 billion rupees (Dh12.3bn) of liquidity into the banking system.

Shobhit Agarwal, the managing director of capital markets for Jones Lang LaSalle India, said the cuts should help the country's property market.

"The RBI's policy is definitely a key to boosting real estate market sentiment and sending out positive signals to global investors," he said.

Economic growth slowed to 5.3 per cent in the quarter between July and September and is struggling under high budget and current account deficits. The consensus is that India needs economic growth of 8 per cent for its burgeoning population of more than 1.2 billion to benefit.

The RBI yesterday lowered its growth forecast for the current fiscal year, which runs until the end of March, to 5.5 per cent from a previous projection of 5.8 per cent. Last July, the RBI's forecast was for growth of 6.5 per cent.

The government announced a slew of economic reforms last year, including opening up its retail and aviation sectors to more foreign investment. But it will take time for India to reap the rewards of these measures.

"On the structural policy front, we expect that the reform push will persist," said Mr Eskesen. "But reforms will inch rather than leap forward, especially on this side of the general elections."

Banks will follow the move and also cut lending rates, said KR Kamath, the head of the industry body Indian Banks' Association.