India Monetary Policy February 2018

India: Reserve Bank of India delivers a surprise rate cut in February

Taking market analysts by surprise, the Reserve Bank of India’s (RBI) Monetary Policy Committee (MPC) cut all monetary policy rates by 0.25 percentage points at its 7 February meeting. The repo rate was therefore decreased to 6.25%, the marginal standing facility to 6.50% and the reverse repurchase rate to 6.00%. The MPC also officially changed its monetary policy stance from December’s “calibrated tightening”, which was supposed to rule out a rate cut, to “neutral”. This meeting was the first presided over by Governor Shaktikanta Das, who took up office on 10 December after his predecessor, Urjit Patel, resigned following pressure from the government to ease monetary policy.

The MPC’s decision was motivated by signs of a slowdown in global economic activity. This also largely explains why the RBI tweaked down its GDP growth forecast for FY 2019 (which ends in April) to 7.2% from 7.4%, and its FY 2020 forecast to 7.4% from 7.5%. Despite this, the domestic economy remains on a solid footing, with survey data showing private-sector economic activity in the October–December period growing at the fastest pace since current records began in 2015. Moreover, the RBI lowered its Q4 FY 2019 inflation forecast to 2.8% from its previous range of 2.7%–3.2%, as well as its H1 FY 2020 inflation forecast range to 3.2%–3.4% from 3.8%–4.2%. All in all, by cutting interest rates, Governor Das gave President Modi a rate-cut gift given that general elections in May are fast approaching.

The MPC did not give concrete indications regarding its next monetary policy moves. However, the fact that it changed its policy stance to “neutral” means it is now clearly willing to respond in an unconstrained manner to incoming macroeconomic data and forecasts. The governor reaffirmed this by stating that “the shift in the stance of monetary policy from calibrated tightening to neutral provides flexibility and the room to address challenges to sustained growth […] over the coming months, as long as the inflation outlook remains benign”. The next monetary policy meeting is scheduled for 2–4 April.

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