JUNE 2, 2015
MUMBAI — The central bank of India on Tuesday cut its benchmark interest rate for the third time this year, taking advantage of subdued inflation to give more support to an economy that many economists doubt is doing as well as the latest growth numbers suggest.
The reduction in the benchmark rate by a quarter percentage point, to 7.25 percent, had been predicted by 35 of 48 analysts polled by Reuters. The previous cuts, in January and March, were by the same amount.
The reduction showed that policy makers at the central bank, the Reserve Bank of India, recognized the need to put the economy on a sounder footing, despite a growth number released on Friday of 7.5 percent in the quarter that ended in March, compared with the same quarter in 2014. At that rate, India is now outpacing China.
“We still have very weak investment,” the governor of the Reserve Bank, Raghuram Rajan, said during a news conference. “We haven’t seen a strong pickup.”
He added that there were factors to suggest that growth was weaker than the headline number made out. “In general, the corporate results have been quite weak, also suggesting that final demand is yet to pick up strongly,” Mr. Rajan said.
Many economists, inside and outside the government, suspect that India’s new way of calculating gross domestic product has overstated the speed of the economy’s rise.
With growth in bank lending at its lowest level in almost two decades, the central bank urged banks to reduce rates quickly and pass the benefits of monetary easing on to the broader economy. Commercial bankers had wanted the central bank to take new steps to free up liquidity for them, which they say would allow them to lower lending rates.
The central bank warned that it would closely track inflationary trends, citing risks posed by the possibilities of weak monsoon rains, which would affect food prices; a recovery in global crude oil prices; and the rupee’s weakening because of volatility in global markets. Consumer price inflation hit a four-month low of 4.8 percent in April, well within the central bank’s target range of 2 percent to 6 percent.
A recent Reuters poll showed that most analysts expected another cut of 0.25 percentage point between October and December. But the central bank projected that inflation would rise to 6 percent by next January, casting doubt on further rate cuts.
The rate reduction announced Tuesday answered calls from the government and business for the central bank to do more to help growth gather momentum. It also completed a reversal of the rate increases ordered by Mr. Rajan between September 2013 and January 2014, when India was experiencing double-digit inflation.
Investors are hoping that Prime Minister Narendra Modi’s economic overhauls and aggressive spending on infrastructure will also help the economy.
“I would characterize the policy today as neither conservative nor aggressive,” Mr. Rajan said. “In some sense, it is a Goldilocks policy: just right, given the current situation.”