Indian central bank cuts interest rates for first time in five years

The Reserve Bank of India has reduced the repo rate to 6.25% 

The Reserve Bank of India (RBI) cut its key interest rate for the first time in five years on Friday. The 0.25% reduction from the previous 6.25% is expected to make borrowing cheaper for consumers and businesses, and aims to stimulate the economy. 

While the move is seen by economists as a positive step, RBI Governor Sanjay Malhotra, who has announced his first monetary policy review since his appointment in December, asserted that the Indian economy faces “risks from global financial markets, trade policies, and weather events.”  

The RBI kept its monetary policy stance “neutral,” which Malhotra said would provide “flexibility to respond to the evolving macroeconomic environment.” In monetary policy parlance, a “neutral” stance aims to maintain a balance between supporting economic growth and controlling inflation, without taking a deliberate stance to either stimulate or slow down the economy. 

“Headwinds from geo-political tensions, protectionist trade policies, volatility in international commodity prices and financial market uncertainties, continue to pose downside risks to the outlook,” the RBI’s Monetary Policy Committee (MPC) said.

Friday’s measures follow the recent announcement of tax benefits for the country’s middle class. To give the economy a fillip, Finance Minister Nirmala Sitharaman last week announced tax reliefs worth $13.3 billion. The measures are expected to boost consumption and support economic growth, which has been a point of concern for New Delhi.

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The government has recently revised country’s annual GDP forecast to 6.4%, the slowest in four years. The RBI, however, expects the Indian economy to grow at 6.7% in the next fiscal year (beginning in April), driven by a recovery in industrial activity and household consumption. 

The first rate cut comes after India’s consumer price inflation (CPI) eased to 5.22% in December, within the central bank’s target of 6%. CPI is a measure of the rate of change in the prices of a basket of goods and services commonly purchased by households. It is a widely used indicator of inflation.

Commenting on the development, DK Srivastava, chief policy adviser at EY India, told the Economic Times that further easing of monetary policy can be expected going forward. “If global headwinds continue to operate as at present, the repo rate may be further reduced by another 25 to 50 basis points. With this directional change in monetary policy, there are four routes through which growth is likely to be supported,” he noted.