India’s interest rates cut to six-year low

INDIA’S central bank cut interest rates to a six-year low of 6.25 percent October 4, citing a good monsoon, in its first monetary policy decision under new governor Urjit Patel.

The Reserve Bank of India said the benchmark repo rate – the level at which it lends to commercial banks – would be brought down by 25 basis points from 6.50 percent.

The rate was last at 6.25 percent in November 2010.

The decision was expected to please Narendra Modi’s government who had become frustrated at the pace with which Patel’s predecessor, Raghuram Rajan, had reduced rates during his three-year tenure.

“The outlook for agricultural activity has brightened considerably,” the RBI said in a statement, adding that 85 percent of the country had received “normal to excess precipitation” during India’s four-month-long monsoon.

Good monsoon rains are vital for Indian crops and a particularly dry season can reduce farm output, raising food prices which can be crippling for the tens of millions of India’s poor.

The above average rains have brought relief to millions of rural farmers who were reeling from two years of drought, helping to push inflation down to a five-year low in August.

Lower interest rates boost consumer spending which can cause an uptick in inflation.

Rajan, who stepped down last month, made controlling inflation a priority. Despite cutting rates four times, he came under government pressure to make deeper cuts to help stimulate spending.

The latest interest rate decision was the first to be made by a new Indian monetary policy committee, which was established last month, rather than the chief of the central bank.

Previously the governor would decide whether to cut rates. Now they are set by a six-member committee, including Patel, two RBI executives, and three independent economists appointed by the government.

Patel enjoys a deciding vote in the event of a tie, but cannot veto or overrule the committee. The panel is similar to a committee in Britain that sets rates for the Bank of England.

All six members of the monetary policy committee voted in favour of cutting rates to 6.25 percent, said the RBI statement.

“Today’s decision implies a slight dovish bias among the new MPC, which contrasts with the more hawkish approach of the previous governor,” said Shilan Shah of Capital Economics.

“This suggests that we could see further modest, loosening over the coming months. But the scope for aggressive rate cuts is limited,” the economist added in an emailed statement.

Modi has made economic growth a priority since taking power in 2014 and India has been the world’s fastest-growing major economy having outpaced Asian rival China for more than a year.

However, growth slowed sharply to 7.1 percent year-on-year in the first quarter of the 2016-17 financial year, down from 7.9 percent recorded in the preceding quarter.

The central bank tipped growth to pick up again as it retained its 7.6 per cent projection for the financial year, adding that it also expected to meet its target of limiting inflation to 5 percent by March 2017.

“The momentum of growth is expected to quicken with a normal monsoon raising agricultural growth and rural demand,” the statement read.

The Bombay Stock Exchange closed up 0.32, or, 91.26 points, at 28,334.55 following the announcement.