(The author is a Reuters Breakingviews columnist. The opinions
expressed are his own)
By Jeff Glekin
MUMBAI, April 17 (Reuters Breakingviews) - It's a tale of
two cities. In Mumbai, the Reserve Bank of India is doing what
it can to propel the Indian economy. The central bank announced
a surprisingly large 50 basis points interest rate cut on
Tuesday, to 8 percent. The announcement came with a thinly
veiled warning to the government in New Delhi that more progress
is needed on fiscal policy and reform. Investors might have been
pleased with the news - the reduction was the first in three
years and was twice as large as expected. But they realised that
Mumbai will not come to their rescue. The benchmark SENSEX index
was up less than 1 percent in afternoon trading.
To start, this cut isn't large enough to bring down lending
rates by a meaningful amount. It will only partly counteract the
effect of higher deposit rates, which have risen from 7 to 9
percent since 2009. More cuts would be needed to make a
difference, and those seem to depend on what happens in Delhi.
The RBI wants the finance ministry to scale back spending on
fuel subsidies and other handouts, as it promised to do in the
March budget. And to get investment really moving, reforms are
still sorely needed. A reduction in the cost of capital won't do
much to help domestic firms overcome the key bottlenecks of
shortages of land and power. That requires better regulation and
greater confidence in the government's policies.
Then there is foreign direct investment, crucial for a
country running a trade deficit of 4 percent of GDP. A RBI
report published last week pointed out that FDI could have been
35 percent higher than was actually received last year if the
government had not increased "policy uncertainty".
The finance minister has put considerable pressure on the
RBI to cut rates. The market appears to believe that today's
action is more a result of that pressure than real conviction.
The caveats offered by the RBI backs up that suspicion. So the
ball's back in Delhi's court. It needs to go further, to show
Mumbai that it also means business.
- The Reserve Bank of India (RBI) cut interest rates for the
first time in three years by an unexpectedly sharp 50 basis
points to 8.00 percent on April 17. A Reuters poll last week had
predicted a 25 basis point cut.
- The central bank warned that India's current account
deficit, which widened to 4.3 percent of GDP in the December
quarter, is unsustainable and will be difficult to finance,
given projections of lower capital flows to emerging markets in
- The markets reacted positively but movements were tempered
as the central bank said that the scope for further rate cuts
was limited. The 10-year bond yield of 8.38 percent was down
from the previous day's close of 8.45 percent. The main BSE
index was up 0.8 percent at 1122 IST.
- Reuters: India slashes rates; sees little room for more
- Reuters: INSTANT VIEW-India central bank slashes rates by
- Reuters: INDIA MARKETS-Gains seen short-lived on RBI's
- For previous columns by the author, Reuters customers can
(Editing by Edward Hadas and David Evans)