Another Easing of Monetary Policy in India

June 2, 2015

Today’s 25-basis point reductions in the Reserve Bank of India’s repo and reverse repo rates to 7.25% and 6.25% constitute the third easing move of 2015, matching in size similar cuts in January and March.  The latest easing did not surprise analysts in its timing.  Although observing continuing potential upside risks to inflation that bear watching and warrant caution in making interest rate decisions, a statement released today provides several reasons for this third round of interest rate cuts since January.

Banks have started passing through some of the past rate cuts into their lending rates, headline inflation has evolved along the projected path, the impact of unseasonal rains has been moderate so far, administered price increases remain muted, and the timing of normalization of U.S. monetary policy seems to have been pushed back. With low domestic capacity utilization, still mixed indicators of recovery, and subdued investment and credit growth, there is a case for a cut in the policy rate today.

The statement predicts a rise near term in inflation due to base effects but lowers projected economic growth in fiscal 2015/16 to 7.6%.  The new 7.25% repo rate level is the lowest since March-April 2013.  The next bi-monthly policy meeting is scheduled for August 4.

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

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