India's Central Bank Cuts Rates for First Time in Years Amidst Economic Slowdown
India's central bank has reduced interest rates for the first time in five years in an effort to stimulate economic growth.
Rate Cut and Monetary Policy Stance
The Reserve Bank of India (RBI), led by Governor Sanjay Malhotra, unanimously voted to lower the benchmark repurchase rate by 25 basis points to 6.25%. The committee maintained its monetary policy stance as "neutral," signaling potential for future rate cuts.
Market Reaction and Growth Outlook
Despite the rate cut, bonds and stocks initially fell as investors anticipated more aggressive steps. However, Malhotra indicated that further policy decisions will be data-driven and guided by the evolving economic outlook.
India's economic growth has slowed to 6.4%, prompting the government to implement tax cuts aimed at boosting consumption. The RBI projects growth of 6.7% for the fiscal year starting April 1, with inflation averaging 4.2%.
Inflation and Policy Priorities
Inflation, which had remained above the 4% target, eased to 5.2% in December. Malhotra emphasized the RBI's commitment to price stability while acknowledging growth risks. He suggested that the primary objective remains price stability, with inflation in the range of 2-6%.
Global Headwinds and External Factors
Despite the rate cut, Malhotra highlighted risks from global financial volatility, trade uncertainty, and weather events. The RBI's neutral stance suggests caution amidst global headwinds.
Rupee Volatility and Liquidity Management
The central bank reiterated its stance on currency intervention, aiming to curb excessive rupee volatility but not targeting a specific level. Malhotra emphasized the RBI's commitment to maintaining ample liquidity in the financial system.