Mumbai: India’s central bank has delivered a back-to-back interest rate cut to support a sluggish economy a week before elections kick off.
The rate was lowered by 25 basis points to 6 per cent. Four of the six members of the bank’s Monetary Policy Committee voted in favor of the rate move, and five voted to keep the neutral policy stance.
“The domestic economy is facing headwinds, especially on the global front,” the central bank said in a statement on Thursday. “The need is to strengthen domestic growth impulses by spurring private investment which has remained sluggish.” (The rupee, which has gained 0.9 percent so far this year after being Asia’s worst performing major currency last year, weakened after the rate decision to trade at 68.806 per dollar as of 12pm in Mumbai.)
Thursday’s cut reverses the 50 basis points of increases delivered by the Reserve Bank of India last year. It also marks the most aggressive easing by any major emerging market central bank in 2019 amid a slowdown in inflation and the US Federal Reserve’s shift to a more dovish policy stance.
While inflation picked up to 2.6 per cent in February, it remains well below the RBI’s medium-term target of 4 per cent. That’s given Governor Shaktikanta Das room to support economic growth after it hit a six-quarter low in the three months ended December.
The RBI cut its inflation forecasts further, seeing it in a range of 2.9-3 per cent in the April-September period, compared with a February projection of 3.2-3.4 per cent. It also sees lower economic growth of 7.2 per cent for the year that began on April 1, down from 7.4 per cent previously, amid signs of weakening domestic investment activity and waning global demand.
The downgrade in the inflation forecast “leaves room for some more rate cuts going ahead,” said Siddhartha Sanyal, chief India economist at Barclays. “At this point, the MPC is taking greater cognizance of the growth scenario.”
Uncertainty about the poll outcome has fueled worries about policy continuity in Asia’s third-largest economy, with businesses curbing investments in an environment of mounting global risks and sluggish domestic demand.