India’s central bank cut interest rates yesterday in a move seen as a boost to Indian Prime Minister Narendra Modi ahead of general elections this year.
The Reserve Bank of India (RBI) said the benchmark repo rate — the level at which it lends to commercial banks — would be reduced by 25 basis points to 6.25 percent.
It marked the first interest rate decision under new Governor Shaktikanta Das, an ally of Modi who was appointed in December last year after his predecessor, Urjit Patel, quit following a public spat with the administration over alleged government interference.
Photo: Reuters
The government was believed to be unhappy with the RBI over a number of issues, including its apparent reluctance to cut rates.
India’s finance ministry had reportedly been pressuring the bank to enact policies to help spur growth ahead of the elections, when Modi will run for a second term.
On Wednesday, a key economic adviser to Modi called on the RBI to slice rates to help boost consumption and investment.
Rajiv Kumar, vice chairman of government think tank NITI Aayog, said the bank should act to help spur “higher growth rates.”
Data showed the economy expanded 7.1 percent year-on-year in July-to-September quarter, down from 8.2 percent in the previous quarter.
Yesterday’s cut surprised the majority of analysts who had expected rates to be held. Thirty two out of 43 economists surveyed by Bloomberg News had predicted no change.
The RBI raised rates twice last year over concerns about inflation.
Consumer prices rose 2.2 percent in December, an 18-month low, well below the Reserve Bank of India’s medium-term target of 4 percent.
Falling food prices have been the main driver of the inflation slowdown, though the core measure — which excludes food and fuel costs — remains elevated.
“Headline inflation is projected to remain soft in the near term,” the central bank said in a statement yesterday.
The decisions are in line with achieving the medium-term inflation target, while supporting growth, it said.
The monetary stimulus is what Modi’s government needs to stoke economic growth, after it unveiled an expansionary budget last week, which included US$13 billion of consumer stimulus ahead of the general elections.
The central bank forecast GDP growth in the year starting April 1 at 7.4 percent, the same as the number it projected in December for the current financial year.
Additional reporting by Bloomberg
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