NEW DELHI: The Reserve Bank of India’s (RBI) surprise decision to cut interest rates for the first time in 18 months yesterday is a pre-election stimulus gift from a compliant central bank for Prime Minister Narendra Modi.
But businesses and farmers - and even some of his own supporters - say it may be too little, too late to help the economy ahead of voting, which must be held by early May.
The quarter-point reduction in the benchmark repo rate follows intense pressure late last year on the RBI to listen to government and business concerns and ease monetary policy.
The threat to the central bank’s autonomy led to the departure in December of its governor, Urjit Patel, and his replacement by Shaktikanta Das, whose views were much more in line with the Modi administration.
There have been signs that Modi’s support has crumbled in parts of a countryside that supported his Hindu nationalist Bharatiya Janata Party (BJP) in the last election in 2014. Among the voters’ biggest concerns are the impact of low farm prices on rural incomes and whether there is enough job creation.
The rate cut will benefit Modi’s government as it will boost economic growth and lending to small businesses, according to Ashwani Mahajan, a leader of the economic wing of the powerful Hindu nationalist group, Rashtriya Swayamsevak Sangh, which is the fountainhead of the BJP.
But it still wasn’t enough, he said.
“The new governor has passed the litmus test, though with 50 percent marks,” said Mahajan, co-convenor of the Swadeshi Jagran Manch, adding that the rate cut should have been at least half a percentage point.
Four of six members of the RBI’s monetary policy committee (MPC) voted to cut the rates, while all six members voted for a change in the monetary policy stance to “neutral” from “calibrated tightening”.
The RBI also eased bank lending restrictions for non-banking finance companies and raised the limit on “collateral free” farm loans in an attempt to boost lending to nearly 120 million rural households. In recent weeks, it has also eased curbs on some state-owned bank lenders and is set to provide the government with a bigger dividend out of surplus central bank funds.
The BJP welcomed the decisions as they will help to dispel any perceptions that the government has not addressed credit issues facing businesses. Some of those issues worsened dramatically after the government suddenly banned the use of then existing high-denomination banknotes in 2016 and hastily introduced a new national sales tax in 2017.
The rate cut comes after the government introduced a budget last week that also provided stimulus for the economy, including handouts for farmers and modest tax cuts for the lower middle class.
