The Reserve Bank of India (RBI) yesterday cut its key interest rate for the first time in nearly five years, as it seeks to boost the sluggish economy and sees inflation easing toward its 4 percent target.
India’s Monetary Policy Committee (MPC), which consists of three RBI and three external members, cut the repurchase rate by 25 basis points to 6.25 percent after having kept it unchanged for 11 straight policy meetings.
The decision was in line with a Reuters poll, in which more than 70 percent of economists had predicted a quarter-point reduction, and marked the first reduction in India’s key rate since May 2020.
Photo: Bloomberg
All six committee members voted to cut the rate and to maintain the monetary policy stance at “neutral.”
The committee noted that although growth is expected to recover, it is much lower than the 8.2 percent in 2023 to 2024 and inflation dynamics have opened space for rate easing, RBI Governor Sanjay Malhotra said in the first policy review since his appointment in December.
Improving employment conditions, recently announced tax cuts, moderating inflation and good agricultural output after a strong monsoon would help growth, Malhotra said.
“The tremendous uncertainties that we are facing today, do not call us to change our stance, so our stance remains neutral,” Malhotra told a press conference.
“This less restrictive policy is only for this particular MPC meeting, and not for going forward,” he said.
The governor’s comments suggest a rate cut at the April policy meeting “is not a done deal” and would depend on the economic situation at that point of time, said Murthy Nagarajan, head of fixed income at Tata Asset Management.
Most economists polled by Reuters ahead of the policy meeting had forecast yesterday’s cut and only one more reduction of 25 basis points in April, taking the policy rate down to 6 percent, although some market watchers, such as Capital Economics and Nomura, forecast several more cuts and say rates would fall by 75 to 100 basis points in this cycle.
India’s benchmark 10-year bond yield rose 6 basis points to 6.71 percent after the announcement, as the rate cut was priced in to the market and the central bank skipped additional measures to ease tight liquidity, which bankers said would delay a pass-through of rate cuts.
The Indian government has forecast annual growth of 6.4 percent in the year ending in March, below the lower end of its initial projection, weighed by a weaker manufacturing sector and slower corporate investments. That would be its slowest pace of expansion in four years.
GDP is expected to rise by 6.3 to 6.8 percent in the next fiscal year.
The central bank yesterday forecast growth of 6.7 percent next year.
“India can achieve growth of 7 percent or more; we should aspire for that,” Malhotra said.
Although retail inflation is still well above the RBI’s medium-term target of 4 percent, it eased to a four-month low of 5.22 percent in December and is seen gradually declining toward the target in the coming months.
The central bank sees inflation averaging 4.8 percent in the current fiscal year, easing to 4.2 percent next year.
Food inflation pressures are expected to ease, Malhotra said, but added that volatile global energy prices pose a risk to the inflation outlook.
Core inflation, though likely to rise, would remain moderate, Malhotra said.
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