The Reserve Bank of India on Friday cut key interest rates for the first time in nearly five years, as cooling inflation offers the central bank room to stimulate the country’s faltering economy.
The Monetary Policy Committee decided to trim the repo rate by 25 basis points to 6.25%, RBI Governor Sanjay Malhotra said in a livestreamed address.
The rate reduction was widely expected and marked RBI’s first cut since May 2020 when the country battled the pandemic-inflicted downturn.
The decision confirmed that the central bank’s priorities have “tilted from containing inflation to providing more support for the economy,” Shilan Shah, deputy chief emerging markets economist at Capital Economics said in a note.
“With the economy likely to remain in a soft patch for a few more quarters yet, further easing is on the cards,” Shah said, forecasting 75 basis points of cuts in this easing cycle.
The central bank forecast real GDP growth for next fiscal year at 6.7%, and inflation rate at 4.2%. For the fiscal year ending March this year, the RBI downgraded real GDP to 6.4% — its worst in four years — from 6.6% forecast in December, while inflation rate was retained at 4.8%.
Indian stocks fell with the benchmark Nifty 50 index shedding as much as 0.5%. The yield on 10-year bonds rose by more than 4 basis points to 6.7%.
In a unanimous decision, the six-member panel voted to keep policy stance of “neutral.” That came as a surprise to some market watchers who had predicted a shift to “accommodative” before the announcement.
Though growth is expected to recover from the low of the second quarter ended September, it is still “much below that of last year,” Malhotra said.
“These growth-inflation dynamics open up policy space for the MPC to support growth, while remaining focused on aligning inflation with the target,” he added.
The benchmark repo rate had remained steady at 6.5% for the past two years, with inflation staying above the central bank’s medium-term target of 4%.
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Following a peak in October, India’s consumer price inflation has eased, dropping within the central bank’s tolerance ceiling of 6%, coming in at 5.22% in December and 5.48% in November.
Asia’s third-largest economy has grappled with a sharp slowdown since last year, with a growth rate of 5.4% in the quarter ended September, undershooting expectations by a large margin and marking its slowest expansion in nearly two years.
With the rupee hitting record lows against the greenback, any cuts to the bank’s policy rate could spark a further rise in domestic inflation, putting further pressure on the currency and likely triggering capital outflows.
Following the Friday address, the Indian rupee strengthened modestly to 87.47 against the greenback.
The RBI has reportedly resorted to interventions in the foreign exchange market to help cushion any sudden outflows of foreign capital and avoid a steep decline in the currency.
Source: CNBC