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Economy

India cuts rate again as election approaches

Central bank's second move in three months seen giving boost to Modi's BJP

Monetary policy easing began in February under Reserve Bank of India Governor Shaktikanta Das, who is considered to be closely aligned with the government of Prime Minister Narendra Modi.   © Reuters

MUMBAI -- India's central bank on Thursday cut its key interest rate for the second time since February, as headline inflation is expected to remain soft for most of the year.

The move will likely give a boost to Prime Minister Narendra Modi's Bharatiya Janata Party's election prospects as he seeks a second term, analysts said.

The Reserve Bank of India's six-member Monetary Policy Committee, which met for the last time before voting begins this month, lowered the repo rate by 25 basis points to 6%.

Four of the committee's six members voted in favor of the cut, including Reserve Bank of India Governor Shaktikanta Das. Monetary policy easing was initiated in February, when the committee lowered the rate in a surprise move to 6.25% from 6.5% and changed its stance from "calibrated tightening" to "neutral." Das is considered to be closely aligned with the Modi government.

The easing was largely expected by analysts and economists, as inflation has showed signs of remaining benign. India's headline consumer price index-based inflation rose slightly in February to 2.57% -- below the central bank's mandate of 4%. However, core inflation -- excluding food and energy -- remained high at nearly 5.5% during that month.

The committee on Thursday revised inflation downward to 2.4% for the quarter ended March and in the range of 2.9% to 3% in the first half of the financial year ending March 2020, based on its favorable outlook for food and energy prices.

Sandip Somany, president of the Federation of Indian Chambers of Commerce and Industry, welcomed the central bank's move but said he expected a larger cut given mild inflation, slowing output and exports growth, and liquidity concerns.

"We hope that the two consecutive cuts in the repo rate would translate into lower lending rates for both retail and corporate credit. This would give an impetus to the domestic economy through greater consumption demand as well as private investments," Somany said. "This is important as we do not foresee much impetus coming from external sources of growth as the global economy continues to show signs of moderation."

He noted that "the real repo rate has remained high for a long time" and that there was room for further cuts.

India's economic growth, though, is becoming a concern, as seen in the latest reports on gross domestic product and industrial production. Growth in GDP slowed to a five-quarter low of 6.6% in the three months ending in December, while the industrial production index expanded by just 1.7% in January compared with 7.5% in the same month a year earlier.

The committee noted that "the output gap remains negative and the domestic economy is facing headwinds, especially on the global front. The need is to strengthen domestic growth impulses by spurring private investment, which has remained sluggish," Das said at a news conference.

The committee also scaled down the country's economic growth forecast for the current financial year to 7.2% from 7.4% previously. It said that since the February policy meeting, domestic investment activity has weakened and the moderation of global growth might impact India's exports. However, higher financial flows to the commercial sector augur well for economic activity.

"Private consumption, which has remained resilient, is also expected to get a lift from public spending in rural areas and an increase in disposable incomes of households due to tax benefits. Business expectations continue to be optimistic," the committee said.

Natixis Research reckons that the U.S. Federal Reserve's decision to end its cycle of raising rates has opened room for Asian central banks to focus on the region's soggy growth. Even India, which boasts the highest economic growth rates in the region, slowed to 6.6% year-on-year in the January to March quarter, compared with 7.1% in the previous quarter, it said.

"And the support will prove timely as Prime Minister Modi will be judged for the economic progress for his tenure since 2014," Natixis said. "With the deceleration (in GDP) as a setback for Modi as well as weakness in employment promises despite strong progress in capital liberalization, in the short-term the upcoming elections mean that the government is doing everything it can to boost lending and support growth."

India's seven-phase general elections begin on April 11 and end on May 19, with all votes to be counted on May 23.

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