India: RBI just made Modi’s job tougher with its rate cut – 3 Aug 2017

  • At their meeting on 2 Aug 17, the makers of India’s monetary policy cut interest rates only marginally. They would seem to have had little choice — but also little confidence that a deeper cut would jumpstart the Indian economy.
  • The preceding days and weeks had featured a deluge of worrisome data, all of it pointing in the same direction: the economy was slowing down, perhaps dangerously so. The index of industrial production, for example, which measures manufacturing and mining output, grew by only 1.7% y/y in May 17.
  • Meanwhile, inflation has remained benign. The consumer price index hit a new low in Jun 17, at 1.5%. Food prices, the usual driver of Indian inflation, had begun to fall some time earlier. Beset on all sides, the RBI cut rates by 25 basis points, bringing the benchmark repurchase rate down to 6% — the lowest since Nov 10.
  • The problem with private investment is not, primarily, the cost of capital. The problem is the unwillingness of banks, already struggling with souring loan portfolios, to lend or of overleveraged companies to borrow. At the same time, administrative paralysis means too much capital is still tied up in stalled projects.
  • Modi’s party runs the central government and most of India’s states. But the RBI seems to be suggesting that the slow speed of project approvals remains a major constraint on growth. The committee pointedly noted that the number of new investment announcements had fallen to a 12-year low, and called out “the lack of traction in the implementation of stalled projects.”
  • According to the Centre for Monitoring the Indian Economy, 12.3% of all projects — both public and private — were stalled in 1Q17. That’s the third-highest level recorded since Jun 95 and the first time since 2004 when over a fifth of private-sector projects have been stalled. This isn’t a problem that can be solved with a 25- or even a 50-basis point cut in the headline policy rate.
  • In other words, the RBI is not going to come to Modi’s rescue. A 25-basis point cut in the policy rate had been priced in already — and given that inflation is almost certainly going to rebound in a bit, there’s not much chance of another cut anytime soon.

External Link :