India Slashes Interest Rate, Growth Forecast as Slump Stretches On

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NEW DELHI—India’s central bank cut its key lending rate to a nine-year low and slashed the country’s growth forecast as Asia’s third-largest economy struggles with a surprising slump in demand.

The Reserve Bank of India lowered its rate to 5.15% from 5.40% on Friday, its fifth rate reduction in a row. It also significantly cut its economic growth prediction for the year ending March 31, 2020, to 6.1% from 6.9%.

The RBI said recent economic indicators have it more worried about growth than about retail inflation, which has been below 4% in the South Asian nation.

“The continuing slowdown warrants intensified efforts to restore the growth momentum,” the RBI said in a statement Friday. The bank said it would continue with an accommodative stance as long as necessary to revive growth.

Caps on New Delhi’s spending, debt-laden companies, thrifty consumers and growing trade tensions globally helped slow India’s gross-domestic-product growth to 5.0% in the June quarter, a six-year low, catching even the central bank by surprise.

Just last year, India claimed the title as the world’s fastest-growing, large economy. In the three months through June, its expansion not only put it behind China but also Indonesia, among others.

The government has scrambled to implement measures to reinvigorate investment and consumption, including merging struggling banks, lowering corporate taxes and opening up some sectors to more foreign investment.

However these measures alone—even with the help of lower interest rates—won’t likely resuscitate the Indian economy until confidence returns to the country, economists said.

“What’s required are more measures to revive demand,” said

Upasna Bhardwaj,

senior economist at Kotak Mahindra Bank in Mumbai. “It will be a slow grind.”

As wage growth slows, unemployment creeps up and an increasing number of well-known companies and lenders buckle under their debt loads, the average Indian is becoming more worried. Auto and motorcycle sales have plunged and other consumer-facing industries are also complaining of a slowdown.

An important indicator of consumer confidence will be the results of the e-commerce sales that mark the beginning of the Diwali shopping season this week. The season, which runs for about a month, usually accounts for about a third of retailers’ annual revenues.

Early indicators suggest the biggest online retailers are headed for new sales highs for the season but overall online sales growth may have slowed. Meanwhile the success of the sales, which feature thousands of deep discounts on popular products, could just be cannibalizing offline sales or sales in other months as cost-conscious consumers are looking for ways to save.

“People are holding back from spending a lot,” said Anagha Deodhar, an economist at ICICI Securities in Mumbai. “They will not spend as much as they used to because there is a fear that job losses will spill to other sectors. Everybody is worried about their jobs.”

Write to Eric Bellman at eric.bellman@wsj.com and Vibhuti Agarwal at vibhuti.agarwal@wsj.com

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