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 its policy rate after inflation fell to an all-time low, marking the first such move in six months. This action was taken to support the Indian economy, which is grappling with high U.S. tariffs.

Monetary Policy Committee Decision

Led by President Sanjay Malhotra, the six-member Monetary Policy Committee has reduced the repo rate to 5.25%, maintaining a "neutral" stance. Prior to the decision, the Indian rupee had fallen to a record low above 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 financial year ending in March from 2.6% to 2%, while increasing its growth forecast from 6.8% to 7.3%. Malhotra noted that despite challenging external conditions, the Indian economy has shown remarkable resilience.

Reactions of the Rupee and the Market

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

Future Projections

Dhiraj Nim, an economist at the ANZ Banking Group, indicated that the U.S. Federal Reserve is expected to engage in monetary easing in December. Nim stated that this would maintain the interest rate differential between the two markets, therefore not weakening the rupee significantly due to the rate cut. Furthermore, he suggested that this could be the last rate cut and that the RBI might utilize liquidity channels to support the economy in the future.