As Expected, RBI Cuts Interest Rate by 25 Basis Points

Mumbai: The Reserve Bank of India (RBI) cut its benchmark interest rate by 25 basis points on Thursday, in a widely expected move to boost the economy, while keeping its monetary policy stance “neutral” despite subdued inflation.

The six-member monetary policy committee (MPC) cut the repo rate to 6% as predicted by 57 of 67 analysts polled by Reuters last week. The reverse repo rate was reduced to 5.75%.

Also Read: Monetary Policy in India: Does the RBI Have a Framework?

Four out of six MPC members voted for a 25 basis points cut, while two called for it to remain unchanged. Five of them called for the policy stance to remain “neutral” while one MPC member voted for it to be changed to “accommodative”.

The RBI highlighted the need to boost domestic growth due to headwinds “on the global front”.

“The need is to strengthen domestic growth impulses by spurring private investment which has remained sluggish,” the RBI wrote in the policy statement.

The underperforming economy could hamper Prime Minister Narendra Modi’s prospects of getting re-elected for a second term in a looming general election.

While the central bank projected retail inflation at 3.8% by January-March 2020 - within its target of 4% - it also warned of the upside risks to price pressures if food and fuel prices rose abruptly, or if fiscal deficits overshot targets.

Annual consumer inflation was just 2.57% in February following five months of deflation in food prices.

The RBI lowered its economic growth forecast to 7.2% for the 2019/20 April-March fiscal year, from the February view of 7.4%.

Sluggish private investment and a weakening rural economy pulled India’s economic growth down to 6.6 percent in the December quarter, its slowest in five quarters, while the unemployment rate hit multi-decades high.

Voting starts next week, but the result will only be known on May 23 and uncertainty over which party will lead the next government has complicated RBI’s task. It cannot be sure of the government’s fiscal plans, as the major parties made promises for heavy spending during their election campaigns.

“Should there be a fiscal slippage...this could crowd out private investment, impact potential output, and result in higher inflation,” the RBI said in a separate monetary policy report.

India’s financial markets were little changed after the policy decision.

The 10-year benchmark bond yield rose to 7.46% from 7.37% before the decision and the rupee strengthened to 68.78 to the dollar from 68.82 before.

The broader NSE Nifty was down 0.18% at 11,622.35 points.

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