India reduces interest rate to its lowest level in 9 years

The Indian central bank lowered its benchmark interest rate for the third time this year, as it sought to reverse the country's severe economic slowdown and signal the possibility of further easing.

The Monetary Policy Committee of the Reserve Bank of India unanimously voted to lower the benchmark reference rate by 25 basis points to 5.75%, bringing it back to its lowest level since the end of 2010.

The RBI has also reduced its GDP growth forecast for the fiscal year from April to March to 7% from 7.2% previously, with key indicators, such as car sales, indicating continued weakness in April and in May. .

The latest decision by the central bank follows two previous cuts and comes a week after the government said India's GDP had risen at its slowest pace in five years, or 6.8 percent for India. year ended March 30, compared to 7.2% the previous year. This is well below the double-digit growth that, according to industry groups, is needed to create jobs for the country's young and ambitious population.

Shaktikanta Das, RBI governor, said current economic conditions compel the committee to "act decisively and on time".

"The growth impulses have weakened considerably," he added.

In parallel with the rate cut, the RBI also changed its monetary policy from neutral to accommodative, which, according to Das, was designed to rule out any rise in short-term rates and signaled the possibility of future easing if growth remained weak.

The RBI has expressed concern over the slowdown in global economic momentum amid a sharp rise in tensions between the US and China and the sharp slowdown in domestic growth.

But badysts have warned that the RBI's latest move may not provide the stimulus that the economy needs, given the setbacks in the banking system that prevented lenders from pbading on the benefits of cuts to borrowers.

According to India Research & Ratings, a rating agency, the drop in household savings has caused some commercial banks to raise rates despite key rate cuts.

"More than the rate cut, it's the transmission of the rate cut in the economy that has become the biggest challenge," he wrote in a note before the RBI's announcement

To complicate matters, the Indian government has sought to finance its own borrowing through a more aggressive promotion of its own sovereign savings schemes, the National Small Savings Fund, which is offered through the post office.

According to the bankers, the system offers savers interest rates of 8 to 8.5%, which further prevents commercial banks from attracting deposits at lower interest rates.

"If we want to reduce the cost of money, the question is how to reduce filing costs to reduce loan costs," said Uday Kotak, general manager of Kotak Mahindra Bank.