India’s central bank yesterday lowered its benchmark interest rate for the first time in six months and signaled that it is open to further easing, predicting inflation would remain relatively low even as the economy continues to boom.
The Reserve Bank of India’s (RBI) six-member monetary policy committee voted unanimously to cut the repurchase rate by 25 basis points to 5.25, in line with the forecasts of most economists surveyed by Bloomberg.
The policy stance was retained at neutral.
Photo: AFP
RBI Governor Sanjay Malhotra said that inflation at a record low and growth above 8 percent mean India was in a “rare Goldilocks period.”
Inflation is expected to remain relatively muted, while the economy is proving resilient in the face of high US tariffs, giving policymakers scope to ease.
“The growth-inflation balance, especially the benign inflation outlook on both headline and core, continues to provide the policy space to support the growth momentum,” Malhotra said in a televised speech.
At a news conference later, he said that “going forward, we expect benign inflation and so if inflation continues to be the way it is, we expect the policy rates to be low and not high.”
Yesterday’s decision was one of the more challenging for the RBI in the past few months. Several economists had predicted that the central bank would keep rates unchanged this week after strong economic growth data and the rupee’s plunge to a record low this week.
The currency is down almost 5 percent against the US dollar this year, the worst performer in Asia, largely because of the slump in exports after US President Donald Trump imposed tariffs on Indian goods of 50 percent.
“The governor’s comments show that the RBI has kept the door open for more policy action,” said Madhavi Arora, an economist at Emkay Global Financial Services. “This is dovish commentary.”
The rupee erased all gains made during an early trading session yesterday and was steady at 90.01 per US dollar as of 2:40pm.
India’s sovereign 10-year bonds rose, with the yields falling as much as 6 basis points to 6.45 percent, after the RBI also announced steps to inject about US$16 billion into the banking system through bond purchases and a foreign exchange swap.
Inflation weakened to 0.25 percent in October, well below the central bank’s 4 percent target, prompting the RBI to lower its forecast for the fiscal year through March to 2 percent from 2.6 percent.
The RBI raised its growth projection for the period to 7.3 percent from 6.8 percent previously.
“Despite an unfavorable and challenging external environment, the Indian economy has shown remarkable resilience,” Malhotra said.
“The headroom provided by the inflation outlook has allowed us to remain growth supportive,” he added.
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