India Rolls Out Stimulus Measures to Counter Economic Slowdown
Prime Minister Narendra Modi has initiated a two-pronged stimulus package comprising tax cuts and interest rate reductions to revive India's decelerating economy. However, investors remain skeptical about the effectiveness of these measures.
The Reserve Bank of India (RBI) recently reduced its key interest rate for the first time in five years, following the government's announcement of significant tax cuts in the federal budget. These initiatives demonstrate the government's urgency in addressing the growth slowdown.
Despite these steps, investor response has remained muted. Bonds have declined post-announcement, and the NSE Nifty 50 index has lost 0.2%. Economists note that while the central bank reduced rates by 25 basis points, its overall actions were conservative.
The bank's monetary policy committee opted to maintain a "neutral" policy stance rather than shift to "accommodative," signaling further rate cuts. Moreover, the budget has been deemed "contractionary," and the central bank's future rate-cutting capacity is limited, given the Federal Reserve's pause in rate hikes, said Indranil Sen Gupta of Shiv Nadar University.
The rupee's recent decline to record lows necessitates cautious interest rate cuts by the RBI to protect the currency and curb inflation. Additionally, the RBI has not implemented any new liquidity measures, such as cash reserve ratio cuts or bond buybacks, which could have boosted market sentiment.
Deutsche Bank's Kaushik Das predicts only one more rate cut in this cycle, a 25-basis point move in April. He asserts that aggressive rate cuts could lead to a premature reversal, harming economic stability.
Some economists question the reliance on central bank dividend payouts to fund tax cuts. They also express skepticism about the boost to spending, as only a small proportion of Indian workers pay income taxes.
Analysts at Nomura Holdings anticipate further rate cuts by the central bank, as India's growth outlook faces challenges such as weak consumer sentiment and corporate profit declines. The nation's growth prospects are also impacted by global trade upheaval caused by US President Donald Trump's policies.
Despite the absence of direct targeting, India's growth is affected by the global slowdown. The government has implemented preemptive measures to mitigate potential fallout, including tariff reductions and accepting unlawful migrants from the US.
India's Chief Economic Adviser expresses optimism, projecting long-term growth of 7%, with a forecast of 6.7% for the coming fiscal year. Standard Chartered Plc economists believe that while growth may weaken further, government actions have provided a floor in light of global uncertainties.