India File: RBI goes for broke on growth

Reuters

a day ago

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The Indian central bank's steepest rate cut in five years has left analysts asking: Why? The central bank appears to be embracing a high-risk, high-reward strategy aiming at a super-charged "aspirational" rate of economic growth. That's our focus this week.
And automakers, including in India, are grappling with a shortage of rare earth magnets after China suspended exports. Scroll down for more on that.
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** China's May exports slow, deflation deepens as tariffs bite
** Thailand and Cambodia say they will return to agreed border positions after fatal clash
** When pegs fly: Trump-induced turbulence hits Hong Kong dollar, interest rates
GOING ALL-IN FOR GROWTH
Reserve Bank of India Governor Sanjay Malhotra has staked out a new mission for the world's fifth-largest economy: To boldly go for growth, with policy moves the conservative central bank had typically shunned as too risky.
Last week's meeting of the central bank had been expected to take a steady-as-it-goes policy approach with a modest rate cut. Instead, it shook up markets with the biggest rate cut in five years and an assurance of abundant liquidity in the banking system.
Malhotra also set out an "aspirational" growth rate of 7-8% for the economy, ratcheting up from an already world-beating 6.5% expected this year. While India's economy is strong, he said, it should be stronger.
That isn't just a random target: Economists estimate that India needs economic growth of close to 8% a year to create enough jobs for its 1.4 billion people.
The RBI's surprise decision seemed, to analysts, a moment when the Indian central bank committed to doing whatever it takes to keep growth strong in the face of major global uncertainties, particularly while inflation is low and giving it room to manoeuvre.
Some are already warning about the potential risks, including Mridul Saggar, a former member of the central bank's monetary policy committee.
"It can only provide transitory, small benefits of some increase in mortgage lending," Saggar wrote in the Hindu Business Line newspaper. Also, the front-loaded action has increased risks in the system by crimping future policy options, he wrote.
In just seven months since the engineer-turned-bureaucrat Malhotra took over as governor, the RBI has moved on multiple fronts to support growth, including interest rate cuts, a rethink on banking liquidity and a postponement of tighter banking regulations.
"It can be asked why the RBI eased so much at a time growth is holding up," Pranjul Bhandari, chief India economist at HSBC, wrote in a note on Friday.
"Our sense is that the RBI is using this opportunity to raise structural credit growth and potential GDP growth," Bhandari wrote. This, she said, signals a "new RBI" focused beyond just immediate economic priorities.
Malhotra hinted as much: "While price stability remains the focus of monetary policy, we are not oblivious to putting in place complementary monetary and credit policies and regulations that support growth and prosperity," he said in the policy announcement.
The central bank also made it clear that, after its aggressive front-loading of policy easing, its room to ease further will be limited for the time being. Most economists predict a pause on rates for the rest of the year.
Markets are showing some scepticism towards the RBI's policy, with long-term bond yields rising, and analysts see a variety of longer-term risks that will bear watching.
"We will now have to track the impact of these on pricing power of corporates and core inflation more closely," said Citibank's chief India economist Samiran Chakraborty. He added that financial market stability indicators would also "attract attention".
Even if inflation this year remains in check, given low food prices, a likely strong monsoon and weak global growth, there are other excesses and imbalances that could emerge from the RBI's large liquidity surplus and low interest rates.
In the post-COVID years, a flood of liquidity carried with it a sharp drop in short-term borrowing rates, not unlike the drop of recent weeks. This encouraged lenders to borrow much more heavily in short-term funds, which central bankers feared could push some of them into a cash crunch.
As recently as last year, the RBI and the government were also concerned about bank funding finding its way into stock market speculation, rather than investing in the real economy.
Do you see the RBI's growth-focused policies as prudent or risky? Write to me at [e-mail], opens new tab.
For Indian automakers, like their global peers, the worldwide shortage of rare earth magnets threatens to stop their operations cold.
The Indian industry warned the government late last month that auto production could grind to a halt within days.
Diplomats, auto executives and business delegations from India, Japan and Europe have sought meetings with Beijing officials to push for faster approvals of rare earth magnet exports, Reuters correspondents Laurie Chen and Aditi Shah reported in this story.
Also, read this story on the panic taking hold across the global auto industry.
India's plan for $80 billion in new coal-power projects by 2031 faces a potentially insurmountable obstacle: Many are planned in water-stressed areas and could end up in conflict with the resource needs of residents.
Don't miss this in-depth report by Reuters journalists Krishna N. Das and Sarita Chaganti.