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AFP
India’s central bank cut interest rates to a six-year low on Tuesday, as the International Monetary Fund predicted the Asian giant would maintain its position as the world’s fastest-growing major economy.
The rate decision was expected to please Narendra Modi’s government who had become frustrated at the pace with which recently-departed Reserve Bank of India chief Raghuram Rajan had reduced rates during his tenure.
The RBI, under newly-appointed governor Urjit Patel, said the benchmark repo rate — the level at which it lends to commercial banks — would be brought down by 25 basis points to 6.25 percent.
In a statement it cited the positive inflationary effects of a good monsoon as the reason for bringing the main rate down to its lowest level since November 2010.
“The outlook for agricultural activity has brightened considerably,” the RBI said in a statement, adding that 85 percent of the country had received “normal to excess precipitation” during India’s four-month-long monsoon.
Good monsoon rains are vital for Indian crops and a particularly dry season can reduce farm output, raising food prices which can be crippling for the tens of millions of India’s poor.
The above average rains have brought relief to millions of rural farmers who were reeling from two years of drought, helping to push inflation down to a five-year low in August. Lower interest rates boost consumer spending which can cause an uptick in inflation.
Tuesday’s interest rate decision was the first to be made by a new Indian monetary policy committee, which was established last month, rather than the chief of the central bank.
Previously the governor would decide whether to cut rates. Now they are set by a six-member committee, including Patel, two RBI executives, and three independent economists appointed by the government.
IMF forecast
The IMF on Tuesday tipped growth to pick up again.
“India’s GDP will continue to expand at the fastest pace among major economies, with growth forecast at 7.6 percent in 2016–17,” it said.
The IMF praised the government’s introduction of a uniform goods and services tax but said further reforms were needed to make India’s labour market more flexible.