Accessibility links

India’s Central Bank Cuts Interest Rate to Spur Economy

  • Anjana Pasricha

FILE - Governor of the Reserve Bank of India (RBI) Raghuram Rajan.

FILE - Governor of the Reserve Bank of India (RBI) Raghuram Rajan.

In a move that is expected to spur the revival of India’s economy, the Central Bank has cut interest rates. Providing even more good news for the country, a World Bank report this week forecast that India will emerge as the world’s fastest growing major economy in two years.

As falling food and plunging oil prices brought inflation down sharply in recent months, the Central Bank on Thursday announced that it has cut interest rates by a quarter percentage point to 7.75 percent.

It was the first rate cut in a year and a half. A spike in inflation had prompted the Central Bank to keep interest rates high, slowing investment and spending. But from 10 percent a year ago, inflation is down to about six percent.

The government, which has been struggling to end a long economic slowdown, was upbeat.

Deputy Finance Minister Jayant Sinha said the interest rate cut will revive investment and accelerate growth.

“The fact that the rate cuts have happened at this time, when economic momentum is picking up and when disinflationary pressures are as strong as they are, I think are a strong indication that the economic cycle has dramatically turned, that this is an inflection point,” said Sinha.

Prime Minister Narendra Modi was catapulted to power last May on the pledge of rebooting an economy growing at its slowest pace in two decades.

In recent months, Modi has promised key reforms to make India more attractive to global and domestic investors.

This has led to renewed optimism that India will emerge as one of the bright spots in a slowing global economy.

The World Bank said in a report this week that India will clock growth of seven percent by 2017, edging past China.

The bank noted steps to cut red tape, to raise infrastructure investment and to deregulate key sectors of the economy are helping.

Chief Economist at Crisil Rating Agency in Mumbai, D.K. Joshi, said there is reason for optimism.

“The government is trying to take care of the bottlenecks that plagued the economy, whether it is energizing the bureaucracy, or it is tapping technology for making the project clearance more efficient or unclogging mining, attempts to introduce goods and service tax. Also, not to mention that the government has stepped up its engagement with the rest of the world, in terms of investment pledges from Japan, etc. And now the Central Bank has also pitched in, so overall there is hope that economy will move to its growth potential,” said Joshi.

Plunging global oil prices have also helped the government in its efforts to put the economy back on track. The Central Bank estimates that India, which depends largely on buying oil from overseas, will save $50 billion on its crude imports this year.

The Central Bank has hinted that more interest rate cuts could follow if inflation continues to stay stable and the government controls its deficit.