Reserve Bank of India Cuts Rates between Scheduled Meetings

March 4, 2015

RBI Governor Rajan released a statement announcing a new monetary policy framework oriented around a single target of 4% CPI inflation give or take two percentage points.  The statement also informed markets about a 25-basis point cut of the RBI repo rate to 7.5%.  A similar cut on January 15 (also not coinciding with a scheduled policy meeting) was the first easing since May 2013; in the meantime, rates had been raised in the early months of Rajan’s stewardship by 25 basis points each in September and October 2013 and a third time in January 2014.  Rajan’s goal is to avoid three straight quarters with inflation outside the 2-6% target boundaries, and the statement concedes that monetary policy needs the assistance of fiscal consolidation and regulatory reform to succeed in its mission.  Prime Minister Modi has endorsed the central bank’s adoption of formal inflation targeting and has convinced Rajan of his seriousness about reducing the budget deficit even if the 3% of GDP goal has to be pushed out a year.  Better fiscal prospects, a steeper recent drop in Indian CPI inflation to 5.1% than RBI officials were expecting, and low capacity usage justified a second rate reduction now.

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



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