India Monetary Policy August 2017

India

India: Central Bank cuts rates to over-seven-year low

August 2, 2017

The Reserve Bank of India (RBI) decided to ease monetary policy at a scheduled meeting on 1-2 August and cut the repo rate from 6.25% to 6.00%—a multi-year low. Four of the six members of the monetary policy committee voted to cut the rate by 25 basis points, while one member voted for a larger hike and one voted to hold the rate unchanged. The move largely met market analysts’ expectations. Along with the chop to the repo rate, the marginal standing facility rate (Bank Rate) was lowered to 6.25% and the reverse repurchase rate to 5.75%.

The looser monetary policy stance comes amid a favorable inflation backdrop. Inflation has fallen to the lowest levels seen in years and a smooth rollout of the government’s landmark GST reform and a normal monsoon have reduced upside risks to the inflation outlook. Moreover, growth was sluggish in the final quarter of FY 2016 and continues to be strained by low private investment, thus warranting a measure to boost economic activity. Despite subdued momentum, the RBI reaffirmed their real GVA forecast of 7.3% for this fiscal year, citing that favorable external conditions will support momentum, although global political risks are substantial.

Overall, the Bank struck an even tone and any changes in the monetary policy stance will likely be data driven and depend on policy evolution. The next monetary policy meeting is scheduled for 3-4 October.

Our analysts are still taking the latest developments into account and an updated Consensus Forecast will be released on 22 August.


Author: Angela Bouzanis, Senior Economist

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