India’s central bank on Thursday cut its key interest rate by a quarter of a percentage point to 5.75 percent with immediate effect to fortify the economy as consumer spending and corporate investment falter.
The benchmark interest rate is what the Reserve Bank of India charges on lending to commercial banks. In a bimonthly review of the economy, the bank also decided to change the stance of its monetary policy from neutral to accommodative.
The central bank noted that inflation remains below its target, even after two earlier rate cuts this year. It also expressed concern over a sharp slowdown in consumer demand and investment.
Lower interest rates help make credit cheaper for borrowers, though they can also spur inflation. The central bank’s decision comes ahead of the federal budget, which is due to be announced by Prime Minister Narendra Modi’s government on July 5 after it won by a landslide in recent elections.
Despite recent headwinds, India is the world’s sixth largest and its fastest-growing major developing economy. Modi is facing strong pressure to help keep growth robust and create jobs for its 1.35 billion people.
The central bank said retail inflation remained unchanged in April, at its March level of 2.9 percent, with higher inflation in food and fuel groups offset by lower cost increases in other categories.
It lowered the growth forecast for India’s current fiscal year to 7 percent due to the slowdown in domestic activities and escalation in a global trade war. An earlier forecast had put growth at 7.2 percent. India’s fiscal year runs from April to March.
According to the Central Statistics Office, the growth of India’s GDP slowed to a five-year low of 5.8 percent in the January-March quarter. The economy expanded at a 6.8 percent pace during the last fiscal year, a five-year low.
Growth in India’s exports flattened to 0.6 percent in April, down sharply from 11.8 percent in March this year due to declines in engineering goods, gems and jewelry, and leather products, the statement said.
Growth in eight core industries decelerated sharply in April, mainly due to weaker production of coal, crude oil, fertilizers, and cement, it said.