RBI Cuts Interest Rates To 6.25% In First Decision By Monetary Policy Committee

The benchmark was lowered by 25 bps to 6.25%, the lowest since January 2011

04/10/2016 3:00 PM IST | Updated 04/10/2016 3:56 PM IST
Danish Siddiqui / Reuters
Reserve Bank of India Governor Urjit Patel

India's new central bank Governor Urjit Patel led a united monetary policy panel to lower interest rates at its first review against the majority forecast of private economists.

The benchmark was lowered to 6.25 percent from 6.50 percent, the Reserve Bank of India said in a statement in Mumbai on Tuesday. That's the lowest since January 2011. The move was predicted by 16 of 39 economists in a Bloomberg survey, with one seeing a cut to 6 percent and the rest forecasting no change.

"They are comfortable on inflation and they took action when they deemed right, even though markets expected otherwise," said Radhika Rao, Singapore-based economist at DBS Bank Ltd.

The decision gives a first glimpse into the thinking of the recently established six-member panel under Governor Patel, who took over from Raghuram Rajan last month. While lower borrowing costs could ease ties with the government of Prime Minister Narendra Modi, room for further reductions will be limited as the central bank seeks to meet its inflation target.

The benchmark S&P BSE Sensex held gains at 0.2 percent after the central bank's decision as of 2:45 p.m. in Mumbai. After initial euphoria, the yield on the 10-year benchmark note fell one basis point to 6.76 percent from 6.78 percent and the rupee is up 0.2 percent at 66.4725 per dollar.

"On balance, the Committee envisages a trajectory taking headline CPI inflation towards a central tendency of 5 percent by March 2017, with risks tilted to the upside" though not as high as flagged in August, the RBI said in the statement.

Key points from the RBI's research department:

See inflation at 5.3 percent in January-March 2017 from 5 percent the previous quarter; this includes the impact of pay increases for government employees and should ease to 4.5 percent a year later

A potential increase in house rent allowances for civil servants risks spurring price pressures; concerns also stem from uncertainty surrounding the U.S. elections, crude prices and global demand

Still see a 7.6 percent increase in gross value added -- a key input of gross domestic product -- for the year through March 2017, picking up to 7.9 percent the next year

"This gives a very comforting feel to the market that inflation will remain subdued," said Nikhil Johri, chief investment officer at Trivantage Capital Management India. "There is scope for one-to-two more rate cuts in the next six months. That will keep the market positive and buoyant."

While India is still the world's fastest-growing big economy, expansion slowed in the three months through June amid anemic investment and weakening consumption, complicating the outlook for Modi, who's facing as many as seven state elections next year.

The country is also in the midst of geopolitical tensions after saying last week it attacked terrorist camps over the border in Pakistan, sending stocks and the rupee to their steepest drop in three months.

Still, the committee may not be able to repeat such monetary support. While inflation slowed more than estimated in August, a pay increase for civil servants could make the improvement short lived, complicating efforts to meet the goal of 4 percent, plus or minus 2 percentage points

More On This Topic