Reserve Bank India Eases Stance

August 2, 2017

By a vote of 4-1-1, Indian monetary policymakers decided to reduce their repo and reverse repo rates by 25 basis points to 6.0% and 5.75%, thus becoming the first Asia central bank to enact a rate cut in 2017. The previous RBI interest rate cut had been done ten months ago. Officials released a statement that that acknowledged persistent geopolitical and domestic uncertainties and retained the same growth prognosis despite some recent softness. A significant decline in headline and core inflation, thanks in part to a firm rupee, was the motivation for today’s action and the reason why analysts had anticipated such a move. Going forward, the main issue to sort out is how much of the decline in inflation is transitory. Until structural and enduring causes of the lower inflation become more apparent, officials are keeping their forward policy guidance in neutral gear.

The MPC noted that some of the upside risks to inflation have either reduced or not
materialised – (i) the baseline path of headline inflation excluding the HRA impact has fallen
below the projection made in June to a little above 4 per cent by Q4; (ii) inflation excluding
food and fuel has fallen significantly over the past three months; and, (iii) the roll-out of the
GST has been smooth and the monsoon normal. Consequently, some space has opened up for
monetary policy accommodation, given the dynamics of the output gap. Accordingly, the
MPC decided to reduce the policy repo rate by 25 basis points. Noting, however, that the
trajectory of inflation in the baseline projection is expected to rise from current lows, the
MPC decided to keep the policy stance neutral and to watch incoming data. The MPC remains
focused on its commitment to keeping headline inflation close to 4 per cent on a durable basis.

As noted, the RBI decision was not made unanimously, but action not only represented a two-thirds majority but also the middle of the range of perceptions on the monetary policy committee. One member didn’t want to cut interest rates at all, and another sought to reduce them by 50 basis points instead of 25 bps. The group left the cash reserve requirement unchanged at 4.0%.

Copyright 2017, Larry Greenberg. All rights reserved. No secondary distribution without express permission.



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