The Reserve Bank of India (RBI) cut its key interest rate for the first time in nearly five years yesterday, as it seeks to boost the sluggish economy and sees inflation easing towards its 4 per cent target.
The Monetary Policy Committee (MPC), which consists of three RBI and three external members, cut the repo rate by 25 basis points to 6.25pc after having kept it unchanged for eleven straight policy meetings.
The decision was in line with a Reuters poll, where over 70pc of economists had predicted a quarter-point reduction, and marked the first reduction in India’s key rate since May 2020.
All six MPC members voted to cut the rate and to maintain the monetary policy stance at “neutral”. The MPC noted that though growth is expected to recover, it is much lower than the 8.2pc in 2023-24 and inflation dynamics have opened space for rate easing, RBI Governor Sanjay Malhotra said in the first policy review since his appointment in December.
Improving employment conditions, recently announced tax cuts, moderating inflation and good agricultural output after a strong monsoon will help growth, Malhotra said.
“The tremendous uncertainties that we are facing today, do not call us to change our stance, so our stance remains neutral,” Malhotra said in a Press conference.
“This less restrictive policy is only for this particular MPC meeting, and not for going forward,” he said.
The governor’s comments suggest a rate cut at the April policy meeting “is not a done deal” and will depend on the economic situation at that point of time, said Murthy Nagarajan, head of fixed income at Tata Asset Management.
Most economists polled by Reuters ahead of the policy meeting had forecast yesterday’s cut and only one more reduction of 25 bps in April, taking the policy rate down to 6pc, though some market watchers such as Capital Economics and Nomura forecast several more cuts and say that rates will fall by 75-100 basis points in this cycle.
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