India CB Cuts Rates By 25 Bps As Inflation Slows

Bruno Cirelli
Agosto 2, 2017

That's well below the RBI's 4 percent target and its projection of 2.0-3.5 per cent in April-September, sparking pressure from the government and others to cut rates by 50 bps on Wednesday or signal another 25 bps easing later this year.

India's central bank cut its main lending rate by a quarter percentage point Wednesday, as inflation and economic growth slow down.

Policymakers viewed that given the dynamics of the output gap, some space has opened up for monetary policy accommodation.

The rate cut is the RBI's first easing move since one of the same size in October and the first by a central bank in Asia since December - a show of confidence in a country that has experienced a surge in foreign investments into debt and shares this year.

"The 25 basis points reduction in the repo rate, even while continuing with the neutral approach, would go a long way in lifting sentiment among businesses", said Chandrajit Banerjee, Director General, CII.

Commenting on the third bi-monthly monetary policy, industry chamber CII said the move will give a fillip to growth, especially at a time of benign core inflation print and tepid private investment.

"Given that the central bank is under a inflation targeting regime, it doesn't make sense to cut rates when you know that inflation will rise going ahead", Pan said. The roll-out of the Goods and Services Tax has been smooth and the monsoon normal.

Cutting the repo rate by 25 basis points to 6.00 percent - the lowest since November 2010 - had been widely anticipated as a slump in food prices sent June consumer inflation to a more than five-year low of 1.54 percent.

The central bank has previously warned that inflation could accelerate due to a seasonal rebound in food prices and factors such as planned pay hikes for government employees.

The projection of real GVA growth for 2017-18 has been retained at 7.3 percent, with risks evenly balanced, the RBI said. "The private investment cycle remains weak and the reduction in the rate will be an investment sentiment booster", said Pankaj Patel, President, Ficci. Further, the bank was concerned about fiscal slippages as states implement farm loan waivers.

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