India’s central bank lowered interest rates more than expected to bolster the economy as China’s slowdown threatens global growth and a commodity rout contains inflation.
Governor Raghuram Rajan cut the benchmark repurchase rate to 6.75% from 7.25%, the Reserve Bank of India said in a statement in Mumbai on Tuesday, the lowest since May 2011. The move was predicted by only one of 52 economists in a Bloomberg survey. Forty-two expected a quarter-point cut and nine saw no change, Bloomberg reported.
“The weakening of global activity since our last review suggests that commodity prices will remain contained for awhile,” Rajan said. Stronger domestic demand is needed to substitute for weaker global growth, he said, adding that “monetary policy has to be accommodative to the extent possible” in current conditions.
“Investment is likely to respond more strongly if there is more certainty about the extent of monetary stimulus in the pipeline, even if transmission is slow,” he said.
Government Pressure
Rajan had faced growing pressure from Prime Minister Narendra Modi’s government to reduce one of Asia’s highest borrowing costs as Indian growth and price pressures slowed. The former chief economist of the International Monetary Fund is looking to keep inflation within 6% by January, 5% a year later and near 4% by early 2018.
Finance Minister Arun Jaitley, who has pushed for rate cuts, welcomed Rajan’s decision and said it “will significantly provide policy support to the real economy and help in the recovery process.”
The benchmark stock index, which has fallen about 3% over the past month, erased the day’s losses and was up 1% on Tuesday. The rupee gained against the dollar and the yield on the 10-year sovereign bond plunged to a July 2013 low of 7.56% in Mumbai.
Rajan said the January target “is likely to be achieved” and “the focus should now shift to bringing inflation to around 5%” by March 2017. The bank will be vigilant for signs monetary policy adjustments are needed to stick to the deflationary path, he said.
Bright Spot
Consumer-price gains slowed to 3.66% in August–below Rajan’s target for a 12th month as oil has tumbled below $50 a barrel and global food costs fell.
The central bank projected consumer-price inflation at about 4.5% in September, according to a separate report. The figure will average 5.8 in the first three months of 2016, below the target of 6% by January, and 4.8% in the first three months of 2017.
India is a bright spot compared with other emerging markets, with economic growth set to surpass a decelerating China this year. The US move to retain near-zero interest rates earlier this month eased concerns of capital outflows.
