India's Central Bank Cuts Interest Rates: Support for the Economy

Interest Rate Cut by the Reserve Bank of India

The Reserve Bank of India (RBI) has implemented a 25 basis point cut in the policy interest rate after inflation fell to an all-time low, marking the first reduction in six months. This move was made to support the Indian economy amid high U.S. tariffs.

Monetary Policy Committee Decision

Led by Chairman Sanjay Malhotra, the six-member Monetary Policy Committee lowered the repo rate to 5.25%, maintaining a "neutral" policy stance. Prior to the decision, the Indian rupee had fallen to record lows, exceeding 90 against the dollar; however, the majority of economists maintained their expectations for a rate cut.

Economic Outlook and Forecasts

Malhotra emphasized that India is in a "Goldilocks period" where low inflation and strong economic growth coexist. In this context, the bank revised its inflation forecast for the fiscal year ending in March from 2.6% to 2%, while raising its growth forecast from 6.8% to 7.3%. Malhotra noted that despite challenging external conditions, the Indian economy has shown significant resilience.

Rupee and Market Reactions

Following the announcement of the decision, the Indian rupee gained 0.2% against the dollar. Additionally, with RBI's new bond purchases, 10-year government bond yields decreased by 6 basis points to 6.46%.

Future Projections

Economist Dhiraj Nim from ANZ Banking Group expressed expectations for the U.S. Federal Reserve to implement monetary easing in December. Nim mentioned that this would maintain the interest rate differential between the two markets, thus limiting the potential weakening of the rupee due to the rate cut. He also forecasted that this may be the last rate cut and that the RBI might use liquidity channels to support the economy in the future.