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) implemented a 25 basis point cut in its policy interest rate after inflation fell to an all-time low for the first time in six months. This move was made to support the Indian economy, which is struggling with high U.S. tariffs.

Monetary Policy Committee Decision

The six-member Monetary Policy Committee, led by Chairman Sanjay Malhotra, lowered the repo rate to 5.25%, while maintaining a "neutral" policy stance. Prior to the decision, the Indian rupee had fallen to a record low, surpassing 90 against the dollar; however, most economists maintained their expectations for an interest rate cut.

Economic Outlook and Forecasts

Malhotra emphasized that India is in a "Goldilocks period," characterized by low inflation and strong economic growth. 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 great resilience.

Responses from the Rupee and Markets

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

Future Projections

Economist Dhiraj Nim from ANZ Banking Group expressed expectations that the U.S. Federal Reserve (Fed) will implement monetary easing in December. Nim stated that this would maintain the interest rate differential between the two markets and, therefore, the interest rate cut would not weaken the rupee significantly. He also projected that this might be the last interest rate cut and that the RBI could utilize liquidity channels to support the economy in the future.