The central bank also downgraded its economic growth forecast for the 2019-2020 financial year to 6.1% from the 6.9% projected earlier. The official policy stance remains “accommodative,” Capital Economics said in a commentary.
“All of this suggests that further loosening will follow in the near term,” it said. It forecast another quarter percentage point cut in December. Some on the central bank board wanted a larger rate cut, and share prices fell, with the benchmark Sensex losing 0.7% to 37,859.16.
In a bimonthly review of the economy the central bank said the reduction was needed to revive growth from a six-year low. India’s first quarter GDP growth plunged to 5%, the slowest pace in six years, as consumer spending and corporate investment faltered. Declining industrial output and automobile sales suggest the slowdown could deepen.
The bank said Friday that abundant rains in August and September have brightened the prospects for agriculture and a revival of domestic demand. But a surprise demonetization in 2016 and the hasty rollout of a goods and services tax have hammered India’s manufacturing sector, especially the auto industry.
Instead of improving government finances as intended, the GST and demonetization have undermined India's financial stability. To counter that, in August the central bank transferred $24 billion to the cash-starved government to help support stimulus measures, prompting criticism from opposition parties that it compromised the central bank's autonomy.
Finance Minister Nirmala Sitharaman recently announced piecemeal policy reforms to stimulate the economy. The Reserve Bank is following the path of many other central banks, including the Federal Reserve, in loosening monetary policy by making credit cheaper in hopes of spurring more lending and business activity.