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 made a 25 basis points cut in its policy rate after six months, following a decline in inflation to an all-time low. This move was aimed at providing support to the Indian economy, which is battling high U.S. tariffs.

Monetary Policy Committee Decision

Under the leadership of President Sanjay Malhotra, the six-member Monetary Policy Committee lowered the repo rate to 5.25%, maintaining a "neutral" stance. Prior to the decision, the Indian rupee had fallen below 90 against the dollar, hitting a record low; however, most economists maintained their expectations for a 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 reduced 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, 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

ANZ Banking Group Economist Dhiraj Nim expressed expectations of monetary easing by the U.S. Federal Reserve (Fed) in December. Nim indicated that this would maintain the interest rate differential between the two markets, and thus the rate cut would not weaken the rupee significantly. He also suggested that this could be the last rate cut and that the RBI might use liquidity channels in the future to support the economy.