Mumbai: The Reserve Bank of India (RBI) on Thursday unexpectedly lowered interest rates and as anticipated, shifted its stance to ‘neutral’ from ‘calibrated tightening’ to boost a slowing economy after a sharp fall in the inflation rate.
The monetary policy committee (MPC) of the RBI cut the repo rate by 25 basis points to 6.25%, as predicted by only 21 of 65 analysts polled by Reuters. Most polled respondents expected the central bank to only change the stance, to neutral.
Four of six members of the MPC voted to cut the rates, while all six voted for a change in the stance.
“Investment activity is recovering but supported mainly by public spending on infrastructure,” the MPC said in a statement. “The need is to strengthen private investment activity and buttress private consumption.”
Indian shares pared gains while ten-year bond yields slid five basis points after the surprise rate cut.
The rupee weakened to 71.69 to the dollar immediately after the announced but strengthened soon after to 71.42.
The National Stock Exchange of India (NSE) Nifty was up 0.04% at 11068.05 while the ten-year benchmark government bond yield fell to 7.51% from Wednesday’s close of 7.56%.
India’s last rate cut, to 6.00%, was in August 2017.
Thursday’s cut is welcome news for Prime Minister Narendra Modi’s government, which wants to boost lending and lift growth as it faces elections by May.
The ruling Bharatiya Janata Party (BJP) is already in an election mode. In its budget on Feb 1, the government doled out cash to farmers and tax cuts to middle-class families, at the cost of a wider fiscal deficit and larger borrowing.
Economic growth fell to a worse-than-expected 7.1% in the July-September quarter from 8.2%, dragged down by slower consumer spending and farm growth, below analysts forecast for a 7.4% increase.