(Dec 5): India’s central bank lowered its benchmark interest rate for the first time in six months after inflation slid to an all-time low, giving the economy a further boost in the face of high US tariffs.
The Reserve Bank of India’s (RBI) six-member monetary policy committee, led by governor Sanjay Malhotra, voted unanimously to cut the repurchase rate by 25 basis points to 5.25% on Friday. The policy stance was retained at neutral.
While a majority of the 44 economists surveyed by Bloomberg had predicted the decision, several had expected the RBI to hold rates after the rupee plunged to a record low to breach 90 to the dollar this week. The currency is down almost 5% against the dollar this year, the worst performer in Asia.
The rupee held onto gains after the rate announcement, and rose 0.2% to 89.7750 against the dollar. India’s sovereign 10-year bonds gained, with the yields falling six basis points to 6.46%, as the RBI also announced fresh bond purchases.
Dhiraj Nim, an economist at Australia & New Zealand Banking Group, said the rate cut shouldn’t undermine the currency too much, since the US Federal Reserve is expected to ease in December, which would preserve the interest rate differential between the two markets.
“We believe this could be the last rate cut,” he said. “From here on, the RBI will mostly support via liquidity.”
Malhotra said low inflation and strong economic growth mean India was in a “rare Goldilocks period”. The RBI lowered its inflation forecast for the fiscal year through March to 2% from 2.6%, while raising its growth projection to 7.3%, up from 6.8% previously.
“Despite an unfavourable and challenging external environment, the Indian economy has shown remarkable resilience,” the governor said. “The headroom provided by the inflation outlook has allowed us to remain growth supportive.”
Friday’s decision was one of the more challenging for the RBI in recent months as it balanced competing priorities. The economy expanded more than 8% last quarter, although exports have plunged after US President Donald Trump slapped 50% tariffs on Indian goods. At the same time, inflation weakened to 0.25% in October, well below the central bank’s 4% target, largely because of falling food prices.
Uploaded by Liza Shireen Koshy
