Reserve Bank of India: First Interest Rate Cut since May 2013

January 15, 2015

RBI Governor Rajan has made good on a promise in December’s review that an intra-meeting rate cut was possible in early 2015 if the momentum of inflation, which started to ease after last July, continued in that direction.  The central bank today announced cuts of 25 basis points in the repo rate to 7.75% and the reverse repo to 6.75%, while holding reserve requirements at 4%.  No policy meeting was scheduled today, but a released statement from the governor lists numerous evidence that inflation has become more contained.

  • A sharper-than-expected drop in veggie and fruit prices.
  • The large fall in international commodity prices.
  • Moderating core inflation.
  • A credible government commitment to fiscal consolidation.
  • Single-digit indications of near-term and longer-term inflation expectations for the first time since September 2009.

Monetary officials now project January 2016 inflation below the 6% target.  The statement gives conditional guidance to additional monetary easing:  “Key to further easing are data that confirm continuing disinflationary pressures. Also critical would be sustained high quality fiscal consolidation as well as steps to overcome supply constraints and assure availability of key inputs such as power, land, minerals and infrastructure. The latter would be needed to ensure that potential output rises above the projected pick-up in growth in coming quarters so as to contain inflation.”

Copyright 2015, Larry Greenberg.  All rights reserved.  No secondary distribution without express permission.



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