Moody's expects RBI to cut rate to boost growth

With less than a week left for the RBI's next monetary policy, Moody's on Thursday said there is room for rate cut and expressed hope that the central bank would reduce it by 0.25 percent to push growth. In its report -- India Outlook: Waiting for Reforms to Fuel Growth -- Moody's Analytics, an economic research unit of Moody's Corp, also pitched for reforms to achieve its potential growth rate which is around 10 percent. "We believe the RBI will cut interest rates again this year. There could be two more 25-basis point rate cuts in 2015... Accommodative monetary policy will lift GDP to 7.6 percent in 2015, increasing to 8 percent in 2016," it said. RBI, which has already cut interest rates by 0.75 percent so far this year, will announce its third bi-monthly policy review on August 4.

Observing that monsoon is not as bad as anticipated and there has been a general fall in global oil prices, the report said "the decline in commodity prices in general has given the RBI room to cut interest rates". The report also cautioned that lack of reforms in areas such as land acquisition, labour laws and Goods and Services Tax (GST) could "derail medium to long term growth prospects". "Though the economy has been in a cyclical upswing since late 2014, it has failed to gain broader momentum.

Green shoots are slowly emerging, but the government's failure to deliver promised reforms is the major impediment," it said. Moody's Analytics said that if India is to catch up to global economic powerhouses such as China, reforms must be delivered swiftly. Reforms can accelerate growth and improve prospects, particularly in emerging market economies.

The logjam in Parliament, the report said, is hindering passage of key reform bills. "India's political infighting is denting business confidence. Without a majority in the Upper House, the ruling Bharatiya Janata Party's power has been nullified and the opposition has blocked proposed reforms.

"Key reforms such as the land acquisition bill, flexible labour laws, and the goods and services tax have failed to pass parliament. And given the political seesaw, these are unlikely to be delivered until later this year or even 2016," it said. The land acquisition bill is a catalyst to investment and passing the bill will improve India's business environment by speeding up the conversion of land for infrastructure use.

"Foreign firms are wary of investing in India, as lengthy delays in acquiring land tend to stall projects," it said. Moody's Analytics is the economic research analysis unit of Moody's Corporation and is independent of Moody's Investor Service, the credit rating agency of the US-based firm.