India Monetary Policy October 2019

India: Reserve Bank of India further cuts rates in October to revive flagging growth

The Reserve Bank of India (RBI)’s Monetary Policy Committee (MPC) cut all monetary policy rates by 0.25 percentage points at its 1–4 October meeting, reducing the repo rate to 5.15%, the marginal standing facility to 5.40% and the reverse repurchase rate to 4.90%. All six MPC members supported the decision to trim rates; meanwhile, five members voted for the approved 0.25 percentage-point cut, in line with market expectations, while one voted for a 0.40% drop. The decision to cut rates again in October brings the total number of cuts this calendar year to five, with an accumulated reduction in interest rates of 1.35 percentage points.

October’s decision was primarily influenced by a downturn in both global and domestic economic fortunes. Externally, wobbles in the U.S. and Chinese economies, exacerbated by trade tensions between the two countries, have weighed on India’s economic performance. Furthermore, domestic growth dropped to 5.0% in Q2 in year-on-year terms, the slowest rate since the final quarter of FY 2012, driven by a significant slowdown in private consumption. In addition, increased dovishness from other major central banks in recent weeks, coupled with inflation languishing towards the bottom of the RBI’s desired 2–6% target range, likely gave the Bank more room to loosen monetary policy in October.

Looking forward, the RBI was dovish in its outlook, commenting that it would “continue with the accommodative stance as long as it is necessary to revive growth, while ensuring that inflation remains within the target”. This indicates there is scope for further cuts in 2019, particularly since at this month’s meeting the RBI reduced its GDP growth forecast for FY 2019 (which runs to March 2020) to 6.1% from 6.9%. As for inflation, the RBI retained its forecast for the second half of the 2019 fiscal year of 3.5–3.7%.

Commenting on the dovish tone of the RBI, economists at Nomura stated:

“On policy, the RBI’s growth projection is set to be disappointed again at end-November (when Q3 GDP data are out), which keeps the door open to another cut at the December policy meeting. However, with the RBI having already delivered 135bp rate cut and diminishing marginal returns from each additional rate cut, we believe the rate easing cycle is closer to its end. We expect the RBI to deliver a final 15bp cut in December.”

The next monetary policy meeting is scheduled for 3–5 December.

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