What a 25 bps cut from the RBI means for the country, Modi and you

The Reserve Bank of India cemented its position as Asia’s most dovish central bank with a third straight interest-rate cut Thursday. Unlike the last two policy decisions, it was unanimous this time, with all six MPC members voting for a cut in rates and an alteration instance. The move gives the Narendra Modi government a helping hand to crank up a growth that fell to a five-year low in the quarter ended March.

Here’s what to make out of this booster cut from Mint Street.

For Narendra Modi
The cut comes at a time when India’s growth has slowed for the fourth straight quarter — to 5.8 percent in the January-March period — started by a slump in both investment and consumption. Although the change in stance might help the government, according to anET View, only 42% of the 50 basis point reduction in policy rates since February has been passed on as lower rates on new lending.

Sticky transmission, thanks to the huge pileup of bad loans on banks’ books, have rendered monetary policy a relatively weak instrument of imparting momentum to economic growth. Now, the government has to bear the brunt of infusing new vigor in the economy.

For India
The easing is in line with global monetary policy turning looser as the Federal Reserve shifts to a more dovish stance.

High-frequency indicators from auto sales to air travel show consumer demand is dwindling, amid a crisis in the shadow banking sector that’s curbed lending. Any shortfall in the monsoon, which waters more than half of India’s farmland mid-June and September, is an added risk to growth.

“The change in stance and downgrading of growth forecasts suggest they are leaving the door open for further loosening,” Shilan Shah, India economist at Capital Economics in Singapore, was cited as saying in a Bloomberg report. “I wouldn’t be surprised to see a further one or two cuts in the next six months.”

While Modi has limited headroom for fiscal stimulus, subdued inflation — at 2.9% in April — allowed monetary policymakers space to bolster the economy. Gross domestic product growth slowed to a five-year low of 5.8% in the three months to March.

“There’s a risk that spare capacity is still tight and a further few rate cuts could lead to a rebound in inflation and higher inflation in the long-term,” replied Shah. “This looks like it will turn into a fairly aggressive easing cycle.”

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