India’s Central Bank cuts interest rates

India’s Central Bank cuts interest rates

The Reserve Bank of India cut interest rates on October 4, 2016, citing a marked slowdown in global growth and a benign inflation outlook, in the first decision made by a recently-appointed committee headed by the new governor, Urjit Patel

The Indian central bank cut its repurchase rate by a quarter percentage point to 6.25%, the lowest in more than 5 years. All 11 economists surveyed by The Wall Street Journal last month had predicted the RBI would keep rates unchanged.

However, many said they expected the central bank of Asia’s third-largest economy to ease its stance. All the analysts forecast one rate cut of 0.25 percentage point before the fiscal year ends on March 31, 2017. Nine of the 11 predicted the cut would happen before the end of 2016.

“The decision is consistent with an accommodative stance of monetary policy,” the Monetary Policy Committee said in a statement.

Including Tuesday’s cut, the RBI has lowered its key lending rate by 1.75 percentage points since January 2015, on the back of rapidly cooling inflation. Former RBI Governor Raghuram Rajan, who oversaw the easing, in his last monetary policy review two months ago left the repurchase rate unchanged, but said the RBI’s stance remained accommodative.

The picture has become more favourable since: consumer-price inflation has been cooling and an abundant monsoon is bound to have a soothing effect on prices going forward. The U.S. Fed has left rates unchanged so far this year, confounding expectations of steep increases after it tightened its policy in December for the first time in a decade. Investors now expect only one hike from the Fed by the end of the year. The rupee has gained strength on international markets.

Consumer inflation—the RBI’s chief indicator—has been particularly benign. The gauge, which is heavily influenced by food prices, slowed sharply in August thanks to good rainfall in recent months. Above-average rains have helped ease concerns over farm supplies.

Data published mid-September showed the benchmark consumer inflation rate declined to a six-month low of 5.05 % in August, almost hitting the RBI’s 5 % target for next March and building the case for more monetary easing by the central bank later this year. In July, consumer prices had grown 6.07 %.

India had adopted an inflation target of around 4 % for the next five years. The target until March 31, 2021, is fixed with an upper tolerance level of 6 % and lower limit of 2 %.

For the first time in the bank’s history, a six-member monetary policy committee was responsible for the decision. The RBI has used advisory committees in the past, but the final decision was always the governor’s. Now, Mr. Patel only casts a deciding vote if there is a deadlock.

The six members of the panel include Indian Statistical Institute Professor Chetan Ghate, Indian Institute of Management Professor Ravindra Dholakia and Delhi School Economics Director Pami Dua, all appointed by the government.

On the central bank’s side, Deputy Governor R. Gandhi and Executive Director Michael Patra sit on the MPC alongside Mr. Patel, the chief architect of the bank’s inflation-focused monetary policy.

While the RBI has made its deciding process more similar to that of well-established banks, it has also narrowed its focus. Historically, the RBI had a wide mandate, which included currency stability and economic growth. It has now been reduced to controlling prices.

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