India’s central bank yesterday cut its key interest rate to a five-year low of 6.5 percent citing a dip in inflation and signaled there could be further rate cuts to come.
In a widely expected move, the Reserve Bank of India said it would lower the benchmark repo rate, the level at which it lends to commercial banks, by 25 basis points down from 6.75 percent.
The move, designed to lower the cost of borrowing and investing to provide a boost to consumers and the economy, takes the rate to its lowest level since early 2011.
Photo: AP
“Retail inflation measured by the consumer price index dropped sharply in February after rising for six consecutive months,” Reserve Bank of India Governor Raghuram Rajan said in the first policy statement of the new fiscal year.
The governor also said the central bank’s stance on monetary policy would remain accommodative, suggesting the bank might make further cuts to interest rates this year.
“The Reserve Bank will continue to watch macroeconomic and financial developments in the months ahead with a view to responding with further policy action as space opens up,” Rajan said.
India’s consumer price inflation softened to a lower-than-expected 5.2 percent in February and has remained in line with the central bank’s target in recent months.
Indian Minister of Finance Arun Jaitley in February said the government would stick to an ambitious target to cut the fiscal deficit to 3.5 percent of GDP this fiscal year.
These two factors have given room for Rajan, whose main priority is to control once-runaway inflation, to loosen monetary policy by cutting interest rates.
In the statement, Rajan said the consumer price index was expected to “decelerate modestly” and remain at about 5 percent this fiscal year.
“Amid signs of continued economic weakness, we had expected that the finance ministry’s commitment to fiscal tightening in the 2016-2017 budget, as well as the drop in inflation in February, would pave the way for a cut in the repo rate,” Capital Economics India economist Shilan Shah said.
The Indian government has said GDP probably grew 7.6 percent over the past fiscal year, which would make India the world’s fastest-growing major economy, but Asia’s third-largest economy faces severe headwinds from a shaky global economic climate that has dampened demand for Indian exports, while private investment remains weak.
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