RBI Cuts Interest Rates To Boost World’s Fastest Growing Economy

IndusView, Tuesday 2 June 2015 (London): The Reserve Bank of India (RBI) has today reduced its interest rates by 25 basis points to 7.25%, the third cut this year, taking advantage of subdued inflation to lend more support to India’s economy.

The Wholesale Price Index, India's most closely watched inflation gauge, has been in the negative zone since November 2014. In April last year, it was 5.55%. Deflationary pressure continued for the sixth month in a row with inflation dropping to a new low of (-) 2.65% in April, mainly on account of decline in prices of fuel and manufactured items even as food prices increased.  

“High inflation has been a constant roadblock for policymakers struggling to breathe life into Asia's third-largest economy and the RBI can’t be complacent about meeting its medium term inflation target,” said Bundeep Singh Rangar, Chairman of London-based advisory firm IndusView. “Today’s decision is unlikely to be the last in the current situation but we are predicting only one more 25 basis point cut.”

The cut comes after the Indian economy registered 7.5% growth in the January to March quarter compared with a year earlier. That made India the world's fastest growing major economy, overtaking China's 7% growth in the same quarter.

Current account deficit (CAD) is estimated to be around 1.5% of the GDP in the current fiscal, helped by sharp fall in oil prices even as gold imports rose in the past few months, the Reserve Bank said today. Gold imports spiked in the month of March and remained elevated in April owing to regulatory relaxations and festival demand. In the first half of the 2014-2015 fiscal, CAD was at 1.9% of the GDP or $18 billion.

South Asia's economic outlook is largely favorable since most economies are expected to experience a strengthening of growth in 2015-2016 on the back of stronger domestic consumption and investment, and a pick-up in exports. According to the United Nations report, the region is projected to reach a GDP growth of 6.7% in 2015 and 6.9% in 2016, up from an estimated 6.3% in 2014.

While portfolio and direct foreign investment flows were buoyant during 2014-2015, with net foreign direct investment into India at $36.6 billion and net portfolio inflows at $41 billion, the year 2015-2016 has begun with net portfolio outflows in the wake of a reduction in global portfolio allocations to India.

“There is a need to further improve the business environment. Reforms in the last one year are welcome, but more needs to be done in order to build foreign investors confidence,” said Rangar. “Decline in foreign investments could put pressure on the country’s balance of payments and also impact the value of the rupee.”

Australia and New Zealand have recently joined Japan in order to persuade India to open its rapidly growing e-Commerce sector for foreign investments. These countries want to include the sector in the 16-nation regional trade pact that's being negotiated.

India does not allow Foreign Direct Investment (FDI) in the business-to-consumer (B2C) segment but 100% FDI is allowed in business-to-business (B2B) transactions, marking the difference in rules for retail and wholesale. It allows 49% FDI in multi-brand retail but with restrictions.

The government is under pressure to come out with a policy on the e-commerce sector in four months as brick-and-mortar retailers have filed a case in the Delhi High Court on the issue.

The pact includes 10 Asean countries and the six partners with which they have free trade agreements (FTAs), including Australia, China, India, Japan, Korea and New Zealand.