India: Reserve Bank cuts interest rates
June 2, 2015
In a scheduled meeting on 2 June, the Reserve Bank of India (RBI) decided to reduce the repurchase rate by 25 basis points, from 7.50% to 7.25%. The move was largely expected by market analysts and marked the third cut this calendar year. In order to maintain the corridor through which monetary policy rates move, the Bank also decided to reduce the marginal standing facility rate (Bank rate) from 8.50% to 8.25% and the reverse repurchase rate from 6.50% to 6.25%.
Commenting on the decision, the Central Bank recognized that inflation has evolved as anticipated and that the consequences of unseasonal rains have been limited so far. In addition, the timing of the normalization of U.S. monetary policy appears to have been postponed and administered price increases have been subdued. Yet, risks to the inflation outlook still exist, particularly related to an unseasonal monsoon, rise in oil prices and volatile external environment. The Bank added that, “assuming reasonable food management, inflation is expected to be pulled down by base effects till August but to start rising thereafter to about 6.0 per cent by January 2016 – slightly higher than the projections in April.” However, the Bank stated that given less optimistic forecasts of the monsoon and a possible increase in the service tax rate, inflationary risks are skewed to the upside.
Regarding India’s economy, the Central Bank commented that economic indicators show mixed signs of recovery and investment as well as credit growth remains subdued. Moreover, the Bank revised its projection for GDP growth for 2015/2016, reflecting the recent downward revision to GVA estimates for fiscal year 2014/2015. The Bank now expects the economy to expand 7.6% this fiscal year, down from the previous 7.8% projection.
In conclusion, the Central Bank summarized that food policy and management will be critical in keeping inflationary pressures contained in the near term. Moreover, the Bank explained that monetary easing can support a fuller fiscal policy to increase public investment and crowd in private investment. The Bank emphasized that, “with low domestic capacity utilization, still mixed indicators of recovery, and subdued investment and credit growth, there is a case for a cut in the policy rate today.”