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India Cuts Key Rate In Surprise Move, Shifts Policy Stance To 'Neutral'

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India's central bank unexpectedly cut its key interest rate in February, after holding it steady in the previous two policy sessions, and changed the monetary policy stance to "neutral" from "calibrated tightening".

The Monetary Policy Committee decided to reduce the repo rate by 25 basis points to 6.25 percent with immediate effect, the Reserve Bank of India said in a statement on Thursday.

Amid high core inflation, economists had expected the rate to remain unchanged in the February policy session, which was the first chaired by the new RBI Governor Shaktikanta Das. Several economists had expected the change in the policy stance.

The latest rate cut is in line with the Narendra Modi government's hopes as his party, the BJP, gears up to fight a general election in May. The party aims to form the government for a second time.

A rate cut now will do little to boost the economy before the election, but it might give a lift to financial markets and investor sentiment, Capital Economics economist Mark Williams said.

"The longer-term concern should be that the credibility that the RBI acquired, particularly under Governor [Raghuram] Rajan, as an inflation fighter will be eroded," the economist noted.

"That would lead to even higher inflation expectation, higher inflation and ultimately higher interest rates too."

The policy-making body voted 4-2 to reduce the repo rate. Policymakers Chetan Ghate and Viral Acharya voted to keep the rate unchanged.

The decision to change the monetary policy stance was unanimous, the bank said.

"Investment activity is recovering but supported mainly by public spending on infrastructure," the bank said.

"The need is to strengthen private investment activity and buttress private consumption."

The MPC reiterated its commitment to achieving the medium-term target for headline inflation of 4 percent.

The RBI lowered the path of CPI inflation to 2.8 percent in the fourth quarter of 2018-19, 3.2-3.4 percent in the first half of 2019-20 and 3.9 percent in the third quarter of 2019-20, with risks broadly balanced around the central trajectory.

The outlook for food inflation appears particularly benign and the unusual pick-up in the prices of health and education could be a one-off phenomenon, the bank said. The oil price outlook continues to be hazy, the RBI added.

The central bank projected GDP growth for 2019-20 at 7.4 per cent - in the range of 7.2-7.4 per cent in the first half, and 7.5 per cent in the third quarter - with risks evenly balanced.

The minutes of the latest policy session will be released by February 21. The next rate-setting session is scheduled from April 2 to 4.

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