MUMBAI: India’s central bank unexpectedly cut interest rates on Thursday, along with an anticipated change in its policy stance to neutral, citing easing inflation and the need to sustain growth in the world’s fastest growing major economy.

The Reserve Bank of India’s (RBI) monetary policy committee (MPC) cut repo rate by 25 basis points to 6.25%. Only eight of the 38 economists surveyed by Bloomberg expected the central bank to effect a rate cut. Banks, however, remained ambiguous about passing on the benefit to borrowers.

The rate cut, the first such move by RBI since August 2017, comes as the central bank trimmed its retail inflation forecast for the first half of the next fiscal and marginally lowered its economic growth estimate to 7.4%. The monetary stimulus, announced in governor Shaktikanta Das’s debut policy meeting, will aid the government in boosting economic growth.

“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," Das told reporters after the meeting.

While the decision to change the policy stance was unanimous, the six-member committee was divided over the decision to cut rates. Ravindra H. Dholakia, Pami Dua, Michael Patra and RBI governor Das voted in favour of a rate cut, while Chetan Ghate and RBI deputy governor Viral V. Acharya were in favour of keeping the policy rate unchanged.

The decision to cut rates comes a week after the Narendra Modi government announced an expansionary budget ahead of national elections that are due by May.

Thursday’s changes by RBI come on top of liquidity expansion. It has already pumped in 2.36 trillion through open-market operations and promised to inject an additional 37,500 crore in February.


Concern over slowing growth marked the monetary panel’s communication, which was further accentuated by falling prices. The committee revised its consumer price inflation (CPI) projection for the first half of the next fiscal lower to 3.2-3.4% from 3.4-4.2% earlier. It, however, ignored the impact of both high core inflation—waiting to see whether the underlying reasons (such as elevated costs of education and healthcare) were secular in nature—and an expansionary fiscal policy.

“Food inflation has continued to surprise on the downside, with continuing deflation across several items and a significant moderation in inflation in cereals. Several food groups are experiencing excess supply conditions domestically as well as internationally. While inflation, excluding food and fuel, remains elevated, the recent unusual pick-up in the prices of health and education could be a one-off phenomenon," RBI said in its statement

Since the last policy in December, CPI has eased to 2.19%, while core inflation, which excludes volatile items such as food and fuel, has remained stubbornly high at 5.7%. Oil prices have remained little changed, compared with levels seen around the December policy.

The rate-setting panel also revised its FY20 GDP growth marginally downwards to 7.4% from its earlier projection of 7.5%. Growth is likely in the range of 7.2-7.4% in the first half and 7.5% in the third quarter.

“The MPC notes that the output gap has opened up modestly as actual output has inched lower than potential. Investment activity is recovering but supported mainly by public spending on infrastructure. The need is to strengthen private investment activity and buttress private consumption," said the statement. This was evident from the subdued growth in select industrial top-line data.

Economists view the policy as a dovish one, leaving room for future rate cuts or a sustained pause.

“We expect FY20 CPI inflation outturn to be somewhat higher than RBI’s estimate, so the bar for future rate cuts will be high, lest there is a dramatic downside either owing to a correction in global crude prices from current levels and/or a persistence of soft food price momentum in FY20. Hence, we retain our call of a prolonged pause, with a neutral stance for now," said Shubhada Rao, chief economist at Yes Bank.

Interestingly, bankers say the liquidity situation is still tight and any chance of passing on the rate cut to their customers immediately is slim. Also, credit has been growing at a faster pace than that of deposits, putting pressure on banks’ resources. Hence, many private banks have been hiking their deposit rates.

“Liquidity condition still continues to be in neutral-deficit mode. Loan-to-deposit ratio for banks, which have the capital and ability to lend, still continues to be high. Therefore, transmission of rate cut into lending rates will take time," said Rajiv Anand, executive director of Axis Bank.

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