RBI Cuts Key Interest Rate for First Time in Nearly Five Years

By Swati Bhat and Sudipto Ganguly
MUMBAI (Reuters) – The Reserve Bank of India (RBI) cut its key interest rate for the first time in nearly five years on Friday, aiming to stimulate the sluggish economy amid easing inflation.

The Monetary Policy Committee (MPC), comprising three RBI and three external members, reduced the repo rate by 25 basis points to 6.25% after holding it steady for eleven consecutive meetings. This decision aligns with a Reuters poll in which over 70% of economists anticipated a quarter-point drop, marking the first reduction since May 2020.

The unanimous vote by all six MPC members maintained a “neutral” monetary policy stance. RBI Governor Sanjay Malhotra noted expectations for growth recovery, albeit lower than the previous 8.2% projection. He mentioned factors such as improving employment, tax cuts, and positive agricultural outcomes following a strong monsoon to support growth.

Malhotra emphasized that due to prevailing uncertainties, the policy stance will remain neutral, indicating that further cuts are not guaranteed in future meetings. Insights from economists suggest only one more reduction may occur in April, while some forecasters predict more extensive cuts in the future.

Following the rate cut, India’s benchmark 10-year bond yield rose six basis points to 6.71%. Stock markets and the rupee remained largely unchanged after the announcement.

WEAKER GROWTH, EASING INFLATION
The government projects annual growth of 6.4% for the fiscal year ending in March, reflecting a slowdown attributed to weaker manufacturing and slower investments. In contrast, the RBI anticipates a 6.7% growth rate for the upcoming year.

Retail inflation, although above the RBI’s target of 4%, has decreased to 5.22%, with expectations of further decline. Food inflation is expected to ease, while global energy price fluctuations could impact the inflation trajectory.

BALANCING TRADE-OFFS
During his first policy announcement, Malhotra outlined the need to balance stability and regulatory efficiency, suggesting a shift from the stricter banking regulations of his predecessor. He acknowledged that tight banking rules contributed to the economic slowdown.

The upcoming rules intended to increase bank capital requirements for specific lending will see a timeline extension of at least one year. Malhotra reiterated the central bank’s commitment to intervene during excessive volatility, rather than targeting specific currency exchange rates, as traders expect the RBI may have supported the rupee prior to this announcement.