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 reduction in the policy interest rate after inflation fell to its lowest level ever. 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, reduced the repo rate to 5.25 percent, maintaining a "neutral" policy stance. Prior to the decision, the Indian rupee had fallen to a record low against the dollar, surpassing the 90 level; 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 lowered its inflation forecast for the fiscal year ending in March from 2.6 percent to 2 percent, while raising its growth forecast from 6.8 percent to 7.3 percent. Malhotra noted that the Indian economy has shown significant resilience despite challenging external conditions.

Rupee and Market Reactions

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

Future Projections

ANZ Banking Group Economist Dhiraj Nim expressed that monetary easing by the Federal Reserve is expected in December. Nim projected 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 forecasted that this could be the last interest rate cut, and that the RBI might use liquidity channels to support the economy in the future.