RBI delivers surprise rate cut in boost for Modi

Bloomberg

India’s central bank unexpectedly cut its benchmark interest rate in Governor Shaktikanta Das’s debut policy meeting, a shift that provides more of the stimulus Prime Minister Narendra Modi’s government needs to stoke growth as an election nears.
The repurchase rate was reduced by 25 basis points to 6.25 percent, a decision predicted by just 11 of 43 economists surveyed by Bloomberg News. The six-member Monetary Policy Committee voted unanimously to switch its stance to neutral from ‘calibrated tightening’ adopted in October.
The cut came a week since Modi’s administration unveiled an expansionary budget, which included $13 billion of help for consumers ahead of the poll that’s due by May. Das took office in December after Urjit Patel resigned as governor amid a heated public battle with the state, which led to questions about the central bank’s independence from politics.
Das pointed to slowdown in inflation for justifying becoming the first Asian central bank to ease borrowing costs this year. Officials also showed more concern about economic growth risks, paving the way for more rate cuts.
“It is vital to act decisively and in a timely manner to address the objective of growth once price stability as defined in the Act is achieved,” Das told reporters in Mumbai, referring to the central bank’s inflation targeting mandate. “The shift in stance from calibrated tightening to neutral provides flexibility to address, and the room to address, sustained growth of India’s economy over the coming months as long as inflation remains benign.” Inflation slowed to an 18-month low of 2.2 percent in December, remaining well below the medium-term target of 4 percent.
India “will now be looking at a balance of growth and inflation rather than just focusing on inflation alone,” said Teresa John, an economist at Nirmal Bang Equities Pvt. in Mumbai. “The rate cut is also driven by the fact that inflation has significantly surprised on the downside.”
The dovish turn follows the US Federal Reserve’s decision of last week to declare a pause in its cycle of rate hikes. That’s allowed emerging markets to take a breath too with the Bank of Thailand keeping its key rate unchanged after hiking in December, while the Philippines also held.

RBI AUTONOMY
Indian bonds gained, and the rupee declined 0.2 percent immediately after the rate move. The currency later reversed losses and was little changed at 71.5275 against the dollar as of 2:00 p.m. in Mumbai.
The policy decision was a tricky one for Das, a career bureaucrat who was hastily installed as governor after Patel quit having raised interest rates twice last year.
The new RBI chief — one of four MPC members who voted for a cut, while two called for no change — is seen as more willing to support the government’s efforts to boost the economy. The surprise move also followed calls from a top Modi adviser for rate cuts to fire up the economy.

FISCAL STIMULUS
Sonal Varma, chief India economist at Nomura Holdings Inc. in Singapore, said the RBI’s autonomy wasn’t at issue this time around.
“Every monetary policy committee member can and should have an independent view,” she said. “But there should be consistency in views over a period of time. The surprise this time was existing monetary policy committee members who voted for calibrated tightening stance in December and a cut in February.”
The decision “restores growth maximization as a secondary objective of the RBI. It also signals a commitment to a symmetric policy to achieve its 4% inflation target — a departure from the RBI’s previous one-sided, conservative stance that aimed to keep inflation below the target,” said Abhishek Gupta, Bloomberg Economics.
The central bank is forecasting gross domestic product growth of 7.4 percent for the fiscal year starting April 1, the same as its estimate for the current year.
Falling food prices have been the main source of weaker inflation, though the core measure — which excludes food and fuel costs — remains elevated at around 6 percent. The central bank sees inflation at 2.8 percent in the final quarter of the fiscal year ending March. Previously, it had projected inflation in a range of 2.7 percent to 3.2 percent in the six months to March.