The Reserve Bank of India (RBI)’s Monetary Policy Committee (MPC) cut all monetary policy rates by 0.35 percentage points at its 5–7 August meeting, reducing the repo rate to 5.40%, the marginal standing facility to 5.65% and the reverse repurchase rate to 5.15%. This decision was supported by four of the six MPC members; the other two members voted for a more conventional 0.25 percentage-point cut, which was what market analysts had expected. The MPC also voted to keep the official monetary policy as “accommodative”. The decision to cut rates again in August brings the total number of cuts this year to four, with an accumulated reduction in interest rates of 1.1 percentage points.
August’s decision was primarily influenced by still-weak economic activity, while the global economic slowdown and escalating trade tensions pose serious downside risks to the economy. In addition, increased dovishness from other major central banks in recent weeks likely gave the RBI more room to loosen monetary policy in August as it will have reduced downward pressure on the currency. The RBI reduced its GDP growth forecast for FY 2019, which runs to March 2020, to 6.9% from 7.0%. In terms of inflation, the RBI adjusted its forecast for H2 FY 2019 to 3.5–3.7%, from 3.4–3.7%.
Sonal Varma, chief India economist at Nomura, noted that while “growth is likely to weaken further in Q2, our leading indicators point to a slight uptick in Q3”. As a consequence of frontloading 1.1 percentage points of easing, the team at Nomura concludes that the RBI seems “poised to take stock of [the monetary policy] transmission to lending rates and eventually growth”. That said, Varma added that “a significant weakening of global growth and its domestic spillover skew the risks towards more easing”. This point was reinforced by Prakash Sakpal, India economist at ING, who noted that “the larger-than-expected rate cut today may well foreshadow continued policy easing and further currency weakness ahead.”
The next monetary policy meeting is scheduled for 2–4 September.
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