India’s central bank cut interest rates more than projected and unexpectedly reduced the cash reserve ratio for banks, providing a major liquidity boost to the economy as growth prospects dim and inflation subsides.
The Reserve Bank of India’s six-member monetary policy committee, headed by Governor Sanjay Malhotra, voted five to one to lower the benchmark repurchase rate by 50 basis points to 5.5%. State Bank of India’s Soumya Kanti Ghosh was the only economist among those surveyed by Bloomberg to predict the move.
The central bank at the same time changed its monetary policy stance to neutral from accommodative, signalling the room for more easing is limited.
The RBI’s aggressive moves suggests growing concerns about the economy’s outlook in the face of global risks, including US President Donald Trump’s sweeping tariffs. India’s economic growth slowed to 6.5% in the fiscal year that ended March, well below the 8% the government and Malhotra said the country is aspiring toward.
Indian assets whipsawed after the surprise moves. Stocks reversed losses to gain as much as 1.1%. The yield curve steepened with shorter yields sliding on cash infusion, while longer-end yields rose on the stance change. The rupee was steady after dropping 0.3% earlier in session.
The central bank lowered the cash reserve ratio — the amount banks need to hold with the RBI — by 100 basis points to 3% in a staggered manner for the rest of the year. The surprise reduction, the biggest since March 2020, is expected to release 2.5 trillion rupees ($37.6 billion) of liquidity into the financial system, Malhotra said in a televised speech from Mumbai.
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The central bank retained its growth forecast at 6.5% for the fiscal year that started in April, while it lowered its inflation projection to 3.7% from 4% earlier.
“Our aspiration is to grow at 8% and we would like to grow as fast as possible,” the governor said in a post-policy press briefing. He cautioned of “limited space” for more easing and said further action will depend on incoming data.
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What Bloomberg Economics says
The government welcomed the cut. Finance Secretary Ajay Seth said the reduction will “help in enriching and sustaining the growth momentum, and facilitate private investments.”
Malhotra said the RBI front-loaded its actions to ensure faster transmission of policy rates.
Economists said the central bank’s moves will boost credit growth that slipped below 10% for the first time in over three years in May.
“The ball is in the banks’ court to transmit easier financial conditions faster,” said Madhavi Arora, an economist at Emkay Global Financial Services Ltd.
Sakshi Gupta, an economist at HDFC Bank Ltd. said there could be some pickup in lending activity as rural demand picks up and urban demand see signs of stabilising.
Future moves
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Easing consumer-price growth is also letting the central bank shift its focus to bolstering domestic demand. India’s headline inflation has stayed below the RBI’s 4% target for the past three months and the outlook seems favourable. Low oil prices and an early onset of the monsoon rains will likely keep prices in check.
Inflation has softened well below the target and the near-term outlook is giving the RBI confidence that it will align to the target on a durable basis, the governor said.
The central bank’s shift toward a neutral stance means more rate cuts may be unlikely in the near-term, said Jeff Ng, head of Asia macro strategy at Sumitomo Mitsui Banking Corporation.
“There’s no more rate cuts for now,” said Upasna Bhardwaj, economist at Kotak Mahindra Bank Ltd. “Further room for rate cuts will depend on any downside to RBI’s growth estimates.”
