India: RBI goes back to cutting interest rates
RBI cuts again: On 5 December, the monetary policy committee of the Reserve Bank of India (RBI) voted unanimously to cut its policy rate to 5.25%. The RBI had begun cutting interest rates in February only to leave them steady from July onward. December’s decision was expected by most economists.
The RBI also announced that it would buy USD 11 billion of bonds and conduct a USD 5 billion FX swap in December in a bid to support the ailing rupee, which has been Asia’s worst-performing currency this year.
Benign inflation outlook prompts cut: The RBI justified the cut by pointing toward a benign inflation outlook. The central bank cut its forecast for inflation in the fiscal year ending March by 60 basis points to 2.0% thanks to moderate commodity prices plus the boost to agricultural production from favorable monsoon rains.
No more cuts expected ahead: The monetary policy committee also decided to leave its monetary policy stance as ‘neutral’, though one member voted to shift it to ‘accommodative’.
Our panelists think that December’s cut will be the last for the near future, with India already enjoying a “rare Goldilocks period” of low inflation and strong GDP growth according to the RBI’s governor.
The RBI’s next meeting is set for 4–6 February.
Panelist insight: Analysts at Goldman Sachs said:
“In our baseline, we expect headline inflation to remain benign and below the RBI’s 4% target over the next two quarters, before adverse base effects nudge it back toward target, limiting scope for further repo rate easing.”