RBI guv surprises Street with rate cut in 1st policy

MUMBAI: India’s central bank unexpectedly cut interest rates on Thursday, along with an anticipated change in its policy stance to neutral, citing easing inflation and the need to sustain growth in the world’s fastest growing major economy.

The Reserve Bank of India’s (RBI) monetary policy committee (MPC) cut repo rate by 25 basis points to 6.25%. Only 11 of the 43 economists surveyed by Bloomberg expected the central bank to effect a rate cut. Banks, however, remained ambiguous about passing on the benefit to borrowers.

The rate cut, the first such move by RBI since August 2017, comes as the central bank trimmed its retail inflation forecast for the first half of the next fiscal and marginally lowered its economic growth estimate to 7.4%. The monetary stimulus, announced in governor Shaktikanta Das’s debut policy meeting, will aid the government in boosting economic growth.

“The shift in stance from calibrated tightening to neutral provides flexibility to address, and the room to address, sustained growth of India’s economy over the coming months as long as inflation remains benign,” Das told reporters after the meeting.

While the decision to change the policy stance was unanimous, the six-member committee was divided over the decision to cut rates. Ravindra H Dholakia, Pami Dua, Michael Patra and RBI governor Das voted in favour of a rate cut, while Chetan Ghate and RBI deputy governor Viral V Acharya were in favour of keeping the policy rate unchanged.

The decision to cut rates comes a week after the Narendra Modi government announced an expansionary budget ahead of national elections that are due by May.

Thursday’s changes by RBI come on top of liquidity expansion. It has already pumped in ₹2.36 trillion through open-market operations and promised to inject an additional ₹37,500 crore in February.

Concern over slowing growth marked the monetary panel’s communication, which was further accentuated by falling prices.

The committee revised its consumer price inflation (CPI) projection for the first half of the next fiscal lower to 3.2-3.4% from 3.4-4.2% earlier. It, however, ignored the impact of both high core inflation — waiting to see whether the underlying reasons (such as elevated costs of education and healthcare) were secular in nature — and an expansionary fiscal policy.

“Food inflation has continued to surprise on the downside, with continuing deflation across several items and a significant moderation in inflation in cereals.

Several food groups are experiencing excess supply conditions domestically as well as internationally.

While inflation, excluding food and fuel, remains elevated, the recent unusual pick-up in the prices of health and education could be a one-off phenomenon,” RBI said in its statement.