India central bank cuts rates ahead of election

Andrew Cummings
February 7, 2019

The RBI cut its estimates on headline inflation which cooled off to a 18-month low of 2.2 per cent in December for the next year, and expects the number to come at 2.8 per cent in March quarter, 3.2-3.4 per cent in first half of next fiscal and 3.9 per cent in third quarter of FY20. "The shift in stance from calibrated tightening to neutral provides flexibility to address, and the room to address, sustained growth of India's economy over the coming months as long as inflation remains benign". The Federal Reserve has changed direction, and now many analysts expect no US rate hikes this year, after four in 2018. The Bank of Thailand kept its key rate unchanged on Wednesday after hiking in December, while the Philippines also held on Thursday. Most respondents had expected the central bank to only change the stance, to neutral from "calibrated tightening". Even then, the first MPC meeting presided by new governor Shaktikanta Das was keenly watched by policy watchers for various reasons. Mr Patel had led the MPC to raise interest rates twice past year.

A softer stance would bode well for Prime Minister Narendra Modi's government, which wants to boost lending and lift growth as it faces elections by May. The central bank had maintained the status quo in the last two Monetary Policy Committee meetings.

The Reserve Bank of India headed by a new chief, Shaktikanta Das, will probably drop its hawkish bias on Thursday, the first step toward a possible interest-rate cut this year as inflation drifts lower and the economy slows. "But there should be consistency in views over a period of time".

The six-member Monetary Policy Committee (MPC) of the Reserve Bank of India (RBI) chose to reduce the key policy rate or the repo rate by 25 bps to 6.25% in the last bimonthly policy review of 2018-19 while changing the policy stance to "neutral" from "calibrated tightening".

The government's expansionary budget - including $13 billion in giveaways to help win votes for an election due by May - complicates the monetary policy outlook.

The decision "restores growth maximisation as a secondary objective of the RBI".

India raised its fiscal deficit projections for the year 2018-19 to 3.4 per cent of the gross domestic product from the previously estimated 3.3 per cent. It also stayed below RBI's inflation target of 4 per cent for five consecutive months.

India's retail inflation declined from 3.4 per cent in October 2018 to 2.2 per cent in December, well below the bank's target of four percent.

Falling food prices have been the main driver of the inflation slowdown, though the core measure - which excludes food and fuel costs - remains elevated at around 6 per cent.

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