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India Reduces Key Interest Rate By 35 Bps

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India's central bank announced a larger-than-expected interest rate cut on Wednesday and kept the door open for more easing to spur slowing economic growth.

The Monetary Policy Committee of the Reserve Bank of India decided to reduce the key rate by 35 basis points to 5.40 percent, the lowest since 2010.

Economists had expected a 25 basis point cut in interest rates.

The central bank had lowered its rates thrice this year after the bi-monthly policy meetings in February, April and June.

The reverse repo rate was adjusted to 5.15 percent from 5.50 percent.

Four MPC members, including RBI Governor Shaktikanta Das, sought a 35 basis points reduction, while two members voted for a quarter-point cut.

The governor said cutting the policy rate by the standard 25 basis points might prove to be inadequate and reducing the policy rate by 50 basis points might be excessive.

Reducing the policy repo rate by 35 basis points was viewed as a balanced level.

Policymakers also decided to maintain the accommodative stance of monetary policy.

The decisions were taken in consonance with the objective of achieving medium-term inflation target, while supporting growth, the bank said.

Shilan Shah, an economist at Capital Economics, said the emphasis is clearly still on looser policy, and another 25 basis point cut is likely in this cycle, probably in October. However, the economist continues to think that further policy loosening would be a misstep.

Real GDP growth outlook for 2019-20 was revised downwards to 6.9 percent from 7.0 percent in June. The bank noted that domestic activity continues to be weak with downside risks from global slowdown and escalating trade tensions.

Inflation is expected to remain within the target over a one-year ahead horizon.

"Even as past rate cuts are being gradually transmitted to the real economy, the benign inflation outlook provides headroom for policy action to close the negative output gap," the bank said.

Addressing growth concerns by boosting aggregate demand, especially private investment, assumes the highest priority at this juncture while remaining consistent with the inflation mandate, the bank assessed.

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