India Monetary Policy June 2019

India: Reserve Bank of India chops rates in June

As expected by market analysts, the Reserve Bank of India’s Monetary Policy Committee (MPC) cut all monetary policy rates by 0.25 percentage points at its 4–5 June meeting, reducing the repo rate to 5.75%, the marginal standing facility to 6.00% and the reverse repurchase rate to 5.50%. This decision was unanimous among MPC members. The MPC also voted unanimously to change the official monetary policy stance from “neutral” to “accommodative”.

June’s decision was primarily influenced by economic growth and inflation considerations. First, GDP growth slowed sharply in the last three months of FY 2018, which ran from April 2018 to March 2019, and the MPC revised down its economic growth forecast for FY 2019 to 7.0% from 7.2%. In addition, consumer price inflation remained steady in April at 2.9%, marking the ninth consecutive month that inflation was below the 4.0% midpoint of the MPC’s target range of 2.0% to 6.0%. The MPC raised its inflation projection for H1 FY 2019 to 3.0–3.1% from 2.9–3.0%, and lowered its projection for H2 to 3.4%–3.7% from 3.5–3.8%. Slower domestic economic growth, tame inflation and the uncertain global economic backdrop further prompted the MPC to cut interest rates in June.

Reflecting on the cut, analysts at Nomura noted that the new “accommodative stance suggests the RBI has become more concerned about the growth slowdown […] We believe the RBI’s growth projections remain optimistic […] but we are broadly in agreement with the RBI’s inflation trajectory. Given the recent stress among shadow banks, which nearly resulted in the default of one of the beleaguered entities, financial stability risks remain elevated […] We believe the shift to an “accommodative” stance could hint at further easing ahead”.

The next monetary policy meeting is scheduled for 5–7 August.

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