By Aftab Ahmed and Swati Bhat
NEW DELHI/MUMBAI- India’s central bank is under increasing political pressure to cut interest rates as soon as this week, after data showed growth was much weaker than expected, but its firm focus on getting inflation down means it is unlikely to do so.
Growth in Asia’s third-largest economy hit a seven-quarter low of 5.4 percent in the July-September period, data showed on Friday, as manufacturing and consumption softened.
The bad numbers follow recent calls from ministers for the Reserve Bank of India (RBI) to cut rates and, according to some economists, strengthen prospects for a near-term cut.
For now, however, the RBI is unlikely to be swayed by the data, arguing instead that the economic weakness is a product of stubborn inflation, which remains its current priority, putting it increasingly at odds with government officials more concerned about growth.
“Elevated inflation makes a December rate cut unlikely, but there could be an explicit acknowledgement that growth needs support too,” Citi’s Chief Economist Samiran Chakraborty said in a note.
The central bank could consider a cut in the cash reserve ratio in December as a step toward easing, he added, though it is expected to keep rates on hold for an 11th straight meeting this week.
ANZ and IDFC First Bank said a 25-basis-point cut in rates this week could not be ruled out, however.
India’s benchmark 10-year bond yield fell 9 basis points to 6.71 percent after the data, while one-year and five-year overnight index swap rates, one of the best indicators to gauge policy expectations, have eased nearly 20 basis points.
Finance Minister Nirmala Sitharaman and Trade Minister Piyush Goyal have publicly called for lower interest rates in recent weeks.
“High interest rates for a long time are hurting consumption and investments,” said a government official, who spoke on condition of anonymity. “The RBI should take steps to lower rates in the next policy.”
The bank should focus on growth while the government would take supply-side measures to ease food prices in coming months, he added.
With inflation driven by a few food items, the central bank should now consider reducing interest rates, added another government source, also speaking on condition of anonymity.
But the central bank sees the weaker growth as a consequence of high inflation, and believes a rate cut is not warranted, said a person familiar with its thinking.
“The RBI has to go by what the Act says. The Act asks RBI to put price stability right on top and then look at growth,” said the person, who spoke on condition of anonymity.
The RBI is mandated to keep inflation in a band of 2 percent to 6 percent, with a medium-term target of bringing it down to 4 percent. Inflation rose to 6.2 percent in October, the latest data shows, with food inflation running at 10.9 percent.
At the center of the debate on interest rates is the divergence between headline and core inflation.
Core inflation, seen as a more accurate reflection of demand since it excludes volatile food and energy prices, has averaged 3.3 percent between April to October 2024, compared to 4.9 percent in the same period in 2023.
But headline inflation has been fueled by volatility in food prices.
“Supply disruptions from heavy rains in major producing states contributed to price pressures in tomatoes, onions, and potatoes, while elevated global prices drove up oil and fat inflation,” the finance ministry said. – Reuters
