21 October 2016
RBI governor Raghuram Rajan said falling global commodity prices has helped the central bank "front-load" the easing. Photo: Bloomberg
RBI governor Raghuram Rajan said falling global commodity prices has helped the central bank "front-load" the easing. Photo: Bloomberg

India cuts key interest rate more than expected

India’s central bank on Tuesday cut its policy interest rate to a four and a half year low of 6.75 percent, from 7.25 percent.

The bigger than expected move is intended to help an economy in danger of slowing down as inflation runs at record lows, Reuters reported.

A poll by the news agency last week showed only one out of 51 economists had expected a 50 basis points cut in the repo rate, while 45 had expected a 25 bps cut, the same magnitude as previous three cuts this year.

“I don’t think we have been excessively aggressive,” Reserve Bank of India governor Raghuram Rajan told a news conference, explaining that falling global commodity prices had helped the central bank “front-load” the easing.

“Clearly this was about, given the state of the economy, how can we move forward,” he said, reflecting widespread concern that growth was losing momentum.

At the same time, the RBI, in a statement written by Rajan, announced a slew of measures intended to further open debt and currency markets, signaling confidence in an economy expected to fare better than emerging market peers once US interest rates are raised for the first time in nearly a decade.

The benchmark 10-year government bond yield dropped as much as 17 bps to 7.56 percent, its lowest level since mid-July 2013, but share indexes edged lower, tracking global markets.

The RBI justified the bigger rate reduction, saying consumer inflation is likely to be running at 5.8 percent in January, below the 6 percent target, thanks partly to the government’s efforts to contain food prices. Inflation dropped to a record low of 3.66 percent in August.

Analysts said the prospect of additional easing was unlikely for a while, with the focus now likely to shift to a government that has struggled to get its reform policies past parliament.

The bigger rate cut “highlights the central bank’s concern over the underlying growth momentum, especially given the disappointing reform progress and leveraged banks, corporates,” said Radhika Rao, an economist at DBS in Singapore.

Calls for lower rates began to grow louder after the economy grew by a slower-than-expected annualized rate of 7 percent in the April-June quarter — faster than China, but well below the government’s target of 8 to 8.5 percent for the year ending in March.

Reflecting the soft going, the RBI lowered its own growth forecast for the fiscal year to 7.4 percent from 7.6 percent previously.

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