Breakingviews - Rate cut signals India's discontent with growth

Reuters

a day ago

MUMBAI, June 9 (Reuters Breakingviews) - India's status as the fastest-growing major economy isn't impressing everyone. The country's central bank sprung a surprise on Friday, slashing the key policy rate by 50 basis points and the cash reserve ratio for lenders by twice as much. Under new Governor Sanjay Malhotra, the Reserve Bank of India is putting more emphasis on supporting GDP. That's fine so long as it can fulfil its inflation-targeting mandate when the need arises.
India last month claimed its position as the world's fourth-largest, opens new tab economy, overtaking Japan. Yet the 6.5% clip at which it grew during the year to the end of March was its slowest pace in four years. That's well behind the average 7.8%, opens new tab headline number the World Bank estimates the South Asian country needs to achieve its aim of high-income status by 2047, the 100th anniversary of independence.
That's the goal Malhotra seems focused on. Barely six months into his role, the former bureaucrat has reduced the central bank's policy rate by a whole percentage point to 5.5%. Further cuts face a higher bar, he said on Friday, justifying the front-loading by citing the need for certainty in an environment of global churn.
By bringing rate cuts forward, Malhotra may avoid a potential monsoon-induced spike in inflation from getting in the way of monetary easing. It marks a departure from the styles of former governors: Urjit Patel, who stepped down in 2018, instituted inflation targeting as the bank's top policy goal and his successor Shaktikanta Das pushed an intense clampdown on unsecured lending.
The size of the rate move will nudge banks led by the State Bank of India (SBI.NS), opens new tab to hasten transmission of the past cuts through loan rates. Lending more is one way to charge up tepid urban spending. Overall consumption accounts for 57% of GDP. Yet there are limits to the RBI's latest actions.
Although the lower reserve ratio for banks will release liquidity worth 2.5 trillion rupees, opens new tab ($29 billion) by December 2025, an almost equivalent or higher sum will be sucked out of the banking system as the RBI unwinds its short bets on the U.S. dollar made to cushion a falling rupee, economists at HDFC Bank reckon. Ultimately the central bank left its GDP forecast of 6.5% for the year ending March 2026 untouched.
Under Malhotra, India's monetary policy may eventually be more supportive to the government's desire for faster growth. Such an outcome would reduce friction between the two sides but the thesis will only be truly tested when retail inflation, currently near a six-year low of 3.16% in April, ticks up higher.
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