India's Central Bank Cuts Rates as Economy Struggles -- Update

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08/07/2019 | 03:48 pm


By Corinne Abrams



MUMBAI -- India's central bank cut its key lending rate to a nine-year low Wednesday as policy makers seek to reignite growth in Asia's third-largest economy.



With economic expansion at a five-year low, increasing consumer demand and private investment have become the central bank's highest priority, Reserve Bank of India Gov. Shaktikanta Das said.



The bank reduced its benchmark rate 0.35 percentage point to 5.40%, the lowest since July 2010 and the fourth reduction this year. The rate cut was bigger than the market had expected.



"A demand and investment slowdown, both put together, is having a sort of a dampening effect on the growth," which is more worrying than inflation, Mr. Das said Wednesday. "We have to recognize that there is room for certain structural reforms which need to be undertaken," he said.



India's economy is showing signs of distress. Business investment has stalled, bank and nonbank lending to businesses and consumers is tepid, government spending is capped by budget restrictions and consumers seem to be reining in spending.



Rising global trade tensions are hurting markets around the world but, unlike many other Asian economies, India is less dependent on exports for growth. Economist say the solution to the economy's slowdown likely lies in domestic policy changes.



Prime Minister Narendra Modi came to power in 2014 promising more jobs and a higher global standing for its 1.3 billion people. Instead the economy has slowed, with gross domestic product growth falling to a five-year low in the year through March.



India's economic growth was 6.8% for the year ended March 31, its slowest pace since the year ended March 31, 2014. The RBI on Wednesday reduced its growth projection for the year ending March 31, 2020 to 6.9% from its previous prediction of 7%.



Mr. Modi was re-elected for a second term in the spring. On the campaign trail he asked voters for more time to deliver on his promises to create jobs and fix the economy.



Some politicians said the central bank wasn't doing enough to help. There have been three RBI governors under Mr. Modi. Mr. Das was appointed in December after his predecessor, Urjit Patel, resigned following months of tensions with the government over restrictions on lending.



In its budget last month, the government said it would increase spending and allow more foreign investment as it seeks to rekindle growth.



Recent economic indicators have suggested a further slowdown in consumer spending. In the quarter ended June 30, car sales dropped 18.4% and investment growth fell to its weakest level since 2015.



"Definitely there is a slowdown, which is evident in the current numbers, " Saugata Bhattacharya, chief economist at Axis Bank said. "More worrying is a weakening of investment sentiment and consumption sentiment."



Slow bank lending is weighing on sentiment, economists said. State-run banks and nonbank lenders are reducing lending as they try to clean up their soured loans from the last decade. Even as the RBI cut rates this year, bank lending slipped 1.8% in April and May, compared with the same period last year.



"Lending has dried up," said Shilan Shah, senior India economist at Capital Economics.



Banks have been slow to pass on the total 0.75 percentage point of rate cuts from February to June to consumers and businesses. They have reduced their rates on new loans by just 0.29 percentage point in that period, according to Mr. Das, meaning the full benefits of the RBI's easing aren't yet making it to the economy.



On Wednesday, the RBI announced steps to help increase lending and consumers' spending. The central bank said it would expand the hours of its fund-transfer system to 24 hours a day from 11 hours a day.



The bank said it would also increase the amount of exposure banks can have to nonbanking financial companies and allow banks to classify loans to those companies as a priority lending for needy sectors such as agriculture. It said it would start a national fraud registry.



Mr. Modi's government could further help boost growth by building more infrastructure and loosening its fiscal policy, economists said.



The government in 2017 implemented a goods-and-services tax. But its rollout caused business disruption and it dragged on growth, according to economists.



Economists say economic growth could start to recover later this year but it will be a long road.



"For consumption and private investment to turn around it might be long term" said Radhika Rao, an economist at DBS Bank in Singapore.



Write to Corinne Abrams at corinne.abrams@wsj.com





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