New RBI chief delivers election cut for PM Modi in a surprise move

The surprise 25-bps rate cut came almost a week after the Centre unveiled an expansionary budget, which included $13 billion of help for consumers ahead of the poll that's due by May.

India’s new central bank chief delivered an unexpected interest rate cut, providing Prime Minister Narendra Modi with the kind of stimulus he needs to stoke economic growth in an election year.

In a sharp reversal from October, when the Reserve Bank of India took rate cuts off the table, Governor Shaktikanta Das -- who took office in December -- opened the door to more policy easing and brought growth firmly back onto the Monetary Policy Committee’s agenda. That was a departure from his predecessor Urjit Patel, whose singular aim was to meet the RBI’s 4 percent inflation mandate.

The surprise move came almost a week after Modi’s administration unveiled an expansionary budget, which included $13 billion of help for consumers ahead of the poll that’s due by May, and days after a top adviser to the prime minister said the RBI should cut rates.

Das, a career bureaucrat, was appointed shortly after Patel resigned as governor amid a heated public battle with the state, which led to questions about the central bank’s independence from politics. Modi’s government has been pushing the RBI to transfer more of its excess capital to the state as well as ease lending restrictions on banks to spur growth.

Government officials were quick to praise the RBI’s move, while economists were more cautious, concerned that the monetary and fiscal stimulus would be inflationary.

“A very balanced and pragmatic policy statement,” Economic Affairs Secretary Subhash Garg said after the rate move. It “underlines low inflation and high growth path for India for 2019-20.”

Das pointed to a sharp slowdown in inflation as justification for the 25 basis-point reduction, taking the repurchase rate to 6.25 percent. The MPC also reversed its policy stance to neutral from ‘calibrated tightening’ adopted in October.

“Reading between the lines, it appears that Mr. Das has changed the RBI’s paradigm overnight, to one where growth is the focus of policy and inflation merely an input into decisions,” said Freya Beamish, chief Asia economist at Pantheon Macroeconomics Ltd.

That opens the way for more rate cuts, she said, adding “we are worried by the U-turn and what this week says about the RBI’s frail autonomy and discipline.”

Market reaction to the surprise rate cut was subdued. The yield on the most-traded 2028 sovereign bonds fell just seven basis points, the rupee eked out a gain and the main stocks gauge closed flat on Thursday.

The U.S. Federal Reserve’s shift to a more dovish stance is giving emerging markets like India a reprieve after last year’s rate hikes. Central banks in the Philippines and Thailand also held rates steady this week.

Business Standard