Published: Thu, February 07, 2019
Markets | By Otis Pena

India central bank cuts rates ahead of election

India central bank cuts rates ahead of election

In a sharp reversal from October, when the Reserve Bank of India took rate cuts off the table, Governor Shaktikanta Das - who took office in December - opened the door to more policy easing and brought growth back into the Monetary Policy Committee's focus.

The MPC noted that retail inflation will remain soft in the near term.

Assuming a normal monsoon in 2019, headline inflation estimates are revised downwards to 2.8 per cent in Q4, FY19, 3.2-3.4 per cent in the first half of FY20 and 3.9 per cent during the third quarter of FY20, with risks broadly balanced around the central trajectory. Most polled respondents expected the central bank to only change the stance, to neutral.

Sonal Varma, chief India economist at Nomura Holdings Inc.in Singapore, said the RBI's autonomy wasn't at issue this time around. This was the first policy under the new Governor Shaktikanta Das.

While four members of the MPC including Das voted for a rate cut, RBI deputy governor Viral Acharya and independent member Chetan Ghate, a professor at the Indian Statistical Institute were in favour of maintaining a status quo on rates.

Data released by the Central Statistics Office (CSO) showed consumer price index (CPI) based inflation at an 18-month low of 2.19 per cent in December against 2.33 per cent a month ago, as food prices continued to slide.

"Every monetary policy committee member can and should have an independent view", she said.

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With inflation largely under control, the big concern for the government is growth, particularly in an election year.

The monetary policy committee (MPC) of the Reserve Bank of India cut the repo rate by 25 basis points to 6.25 percent, as predicted by only 21 of 65 analysts polled by Reuters.

The government's expansionary budget - including $13 billion in giveaways to help win votes for an election due by May - complicates the monetary policy outlook. "It also signals a commitment to a symmetric policy to achieve its 4 per cent inflation target - a departure from the RBI's previous one-sided, conservative stance that aimed to keep inflation below the target."- Abhishek Gupta, Bloomberg Economics.

Patel's exit prompted some to fret the RBI's independence was under threat, but some economists argued that Thursday's decision should not be read as a surrender to pressure.

The CSO has estimated GDP growth at 7.2 per cent for 2018-19.

Falling food prices have been the main driver of the inflation slowdown, though the core measure - which excludes food and fuel costs - remains elevated at around 6 per cent.

For April-September, the MPC lowered its projection on headline inflation to 3.2-3.4 percent from the 3.8-4.2 percent seen in December.

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