India’s central bank just slashed interest rates for the third time this year as it tries to get the country’s economy back on track.
The bank attributed its decision to the growth plunge, citing a drop in private sector demand and exports. “However, the overall slowdown in growth was cushioned by a large increase in [government spending],” it added.
The cut takes India’s key interest rate to its lowest level in nearly a decade and should provide a boost for Prime Minister Narendra Modi as his second term in office begins following a landslide election win.
Modi secured a bigger majority than expected even as growth slumped to 5.8% in the quarter ended March, the weakest rate of expansion in two years. The economy grew by 6.6% in the previous quarter.
The loss of pace means India has surrendered the title of world’s fastest-growing major economy to China, which grew at 6.4% in the first three months of this year.
Modi, who first swept to power in 2014 on promises to revive India’s economy and boost growth, won reelection by an even bigger margin in the latest vote which concluded on May 23.
Yet growth has eroded over the past three quarters after hitting 8% in the middle of 2018.
Analysts had widely predicted the rate cut, given Modi’s uphill task of boosting growth and creating millions of jobs for India’s young population. And more cuts could be on the way.
The bank “has laid the groundwork for further loosening,” Shilan Shah, India economist at Capital Economics, said in a note, pointing out that the bank had also changed its official stance from “neutral” to “accommodative.”