India cuts key rate amid dampened growth

India’s central bank has moved to bring its key interest rate to its lowest point in 6.5 years

 
The Indian economy has slowed thanks to Prime Minister Modi's demonetisation scheme 
Author: Kim Darrah
August 3, 2017

The Reserve Bank of India (RBI) has reduced its interest rate by 0.25 percent after June’s figures showed a drop in the headline inflation rate to its lowest level since 2012. In a country that once struggled with chronic price growth, authorities are now grappling with a cooling economy and below-target inflation. The decision brings India’s policy rate down to a 6.5-year low of six percent.

June’s figures revealed a consumer price index year-on-year growth rate of just 1.25 percent, a substantial way off the bank’s target rate of four percent. For the first time since CPI measurements at the RBI began, the price of food and drink fell into deflation in May, and continued to slip into June.

The Indian economy is not only witnessing subdued prices, but also dampened economic growth

In a statement, the RBI argued that low rates could be put down to short-term effects that will dissipate or go into reverse by August. The bank noted: “While inflation has fallen to a historic low, a conclusive segregation of transitory and structural factors driving the disinflation is still elusive.” The bank said that it would continue to monitor inflation rates to establish whether the recent lull signifies that a “more durable disinflation is underway”.

The Indian economy is not only witnessing subdued prices, but also dampened economic growth. The first quarter of this year marked the slowest quarter since 2014, as the effects of Prime Minister Modi’s extravagant demonetisation experiment made their mark on economic activity.

There has also been a weakening in industrial performance and merchandise export growth. Though the RBI noted that trade has been supported by the “modest firming up” of global demand, import growth has far outstripped export growth in India; the country’s trade deficit stood at $40.1bn in the first quarter of this year, more than twice last year’s level.

While spending on imports was up, capital investment has slumped. In a statement, the RBI noted: “The weakness in the [capital expenditure] cycle was also evident in the number of new investment announcements falling to a 12-year low in Q1, the lack of traction in the implementation of stalled projects, deceleration in the output of infrastructure goods, and the ongoing deleveraging in the corporate sector.”

For more about India’s economy and political direction, take a look at World Finance’s special report on the country.