India central bank cuts rates for the first time in nearly five years, forecasts faster growth next year

The Reserve Bank of India on Friday cut key interest rates for the first time in nearly five years, as cooling inflation offers the central bank room to stimulate the economy.

The Monetary Policy Committee decided to trim the repo rate by 25 basis points to 6.25%, RBI Governor Sanjay Malhotra said in a livestreamed address Friday.

The rate cut was widely expected and marked RBI’s first interest rate cut since May 2020 when the country battled the pandemic-inflicted downturn.

The central bank forecast real GDP growth for next fiscal year at 6.7%, and inflation rate at 4.2%. For the fiscal year ending March this year, the RBI projected real GDP growth at 6.4%, its worst in four years, versus 6.6% previously, while inflation rate was retained at 4.8%.

Indian stocks fell with the benchmark Nifty 50 index shedding as much as 0.5%. The yield on 10-year bonds rose by more than 4 basis points to 6.7%.

In an unanimous decision, the six-member panel voted to keep policy stance of “neutral.” That came as a surprise to some market watchers who had predicted a shift to “accommodative” before the announcement.

Though growth is expected to recover from the low of the second quarter ended September, it is still “much below that of last year,” Malhotra said.

“These growth-inflation dynamics open up policy space for the MPC to support growth, while remaining focused on aligning inflation with the target,” the governor said.

The benchmark repo rate had remained steady at 6.5% for the past two years, as inflation stayed above the central bank’s medium-term target of 4%.

Following a peak in October, India’s consumer price inflation has eased, dropping within the central bank’s tolerance ceiling of 6%, coming in at 5.22% in December and 5.48% in November.

The Indian government has been steadily lowering its full-year real GDP forecasts, after the economic growth missed expectations by a large margin in the quarter ended September, when its grew by 5.4% — its slowest expansion in nearly two years.

With the rupee hitting record lows against the greenback, any cuts to the bank’s policy rate could spark a further rise in domestic inflation, putting further pressure on the currency and likely triggering capital outflows.

RBI has acted to implement substantial interventions in the foreign exchange market to help cushion a potential sudden outflows of foreign capital and avoid any steep fall in the currency.

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