February 7, 2019 / 6:35 AM / 6 months ago

India unexpectedly cuts key rate, changes stance to neutral

MUMBAI (Reuters) - India’s central bank on Thursday unexpectedly lowered interest rates and, as anticipated, shifted its stance to “neutral” to boost a slowing economy after a sharp slide in the inflation rate.

CCTV cameras are seen installed above the logo of Reserve Bank of India (RBI) inside its headquarters in Mumbai, India, February 7, 2019. REUTERS/Francis Mascarenhas

The cut is welcome news for Prime Minister Narendra Modi’s government, which wants to boost lending and lift growth as it faces elections by May.

The ruling Bharatiya Janata Party is already in election mode. In its budget on Feb. 1, the government doled out cash to farmers and tax cuts to middle-class families, at the cost of a wider fiscal deficit and larger borrowing.

The Reserve Bank of India’s monetary policy committee (MPC) cut the repo rate by 25 basis points to 6.25 percent, as forecast by 21 of 65 analysts polled by Reuters. Most respondents expected the central bank to only change the stance, to neutral.

Four of six MPC members voted to cut the rates, while all backed the stance change to “neutral” from “calibrated tightening”.

“Investment activity is recovering but supported mainly by public spending on infrastructure,” the MPC said in a statement, adding there is a need to strengthen private investment and buttress private consumption.

India’s rate cut continues a trend in which some major central banks, worried about slowing global growth and helped by low inflation, have moved firmly away from the tightening moves made last year. The Federal Reserve has changed direction, and now many analysts expect no U.S. rate hikes this year, after four in 2018.

The last Indian repo rate cut, to 6.00 percent, was in August 2017.

Graphic - India's sliding interest rates: tmsnrt.rs/2HGudDp

Indian shares pared gains while 10-year bond yields slid 3 basis points after the surprise rate cut. The Indian rupee weakened to 71.69 to the dollar immediately after the decision was announced, but it later strengthened to 71.45. The NSE index was up 0.05 percent at 11067.05 while the 10-year benchmark government bond yield fell to 7.52 percent from Wednesday’s close of 7.56 percent.

SLOWER GROWTH

The MPC meeting - the first for RBI Governor Shaktikanta Das - also decided to lower India’s inflation projection for April-September to 3.2-3.4 percent from the 3.8-4.2 percent seen in December.

India’s December headline inflation fell to an 18-month low of 2.19 percent, well below the RBI’s medium-term 4 percent target.

The MPC also trimmed its economic growth forecast, to 7.2-7.4 percent during April-September from its previous 7.5 percent estimate.

The Reserve Bank of India (RBI) Governor Shaktikanta Das attends a news conference after a monetary policy review in Mumbai, India, February 7, 2019. REUTERS/Francis Mascarenhas

“The central bank’s commentary on inflation and growth support a dovish outlook for the policy,” said Shashank Mendiratta, an economist with IBM in New Delhi, noting that on growth the RBI once again highlighted downside risks to its forecast.

“There is a possibility of another rate cut by the central bank in April. The macro backdrop as such supports the RBI’s stance,” said Mendiratta.

Economic growth had fallen to a worse-than-expected 7.1 percent in the July-September quarter from 8.2 percent for the previous one, dragged down by slower consumer spending and farm growth.

Reporting by Suvashree Dey Choudhury and Swati Bhat; Additional reporting by Mumbai and Bengaluru Newsrooms; Editing by Euan Rocha and Richard Borsuk

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