The Reserve Bank of India unexpectedly cut interest rates Tuesday, lowering its benchmark repurchase rate by 25bps from 6.50% to 6.25% the lowest in more than 5 years, with just 16 of 39 economists surveyed by Bloomberg predicting a rate cut, and all 11 economists polled by the WSJ predicting rates would remain unchanged. The central bank cited a marked slowdown in global growth and a benign inflation outlook, in the first decision made by the recently-appointed committee headed by the new governor, Urjit Patel.

The RBI’s decision to cut its rate brings the number of central bank rate cuts in 2016 to a total of 102, surpassing by 1 the central bank rate cuts announced in all of 2015, which according to Reuters amounts to 101.

For the first time in the bank’s history, a six-member monetary policy committee was responsible for Tuesday’s decision. The RBI has used advisory committees in the past, but the final decision was always the governor’s. Now, Mr. Patel only casts a deciding vote if there is a deadlock. The six members of the panel include Indian Statistical Institute Professor Chetan Ghate, Indian Institute of Management Professor Ravindra Dholakia and Delhi School Economics Director Pami Dua, all appointed by the government. On the central bank’s side, Deputy Governor R. Gandhi and Executive Director Michael Patra sit on the MPC alongside Mr. Patel, the chief architect of the bank’s inflation-focused monetary policy.

The market reaction was relatively muted:

  • 6.97% bonds due Sept. 2026 pare gains; yield now little changed at 6.767%. Indian bonds lost ground soon after RBI cut possibly because accompanying rhetoric was relatively neutral rather than dovish
  • Rupee up 0.2% at 66.4713 per dollar; gained as much as 0.3%
  • Sensex extends gains to 0.5%

While few had expected a major announcement today, many said they expected the central bank of Asia’s third-largest economy to ease its stance. All the analysts forecast one rate cut of 0.25 percentage point before the fiscal year ends on March 31, 2017. Nine of the 11 predicted the cut would happen before the end of 2016.

“The decision […] is consistent with an accommodative stance of monetary policy,” the Monetary Policy Committee said in a statement.

As the WSJ notes, including Tuesday’s cut, the RBI has lowered its key lending rate by 1.75 percentage points since January 2015, on the back of rapidly cooling inflation. Former RBI Governor Raghuram Rajan, who oversaw the easing, in his last monetary policy review two months ago left the repurchase rate unchanged, but said the RBI’s stance remained accommodative.

The picture has become more favorable since: consumer-price inflation has been cooling and an abundant monsoon is bound to have a soothing effect on prices going forward. The U.S. Fed has left rates unchanged so far this year, confounding expectations of steep increases after it tightened its policy in December for the first time in a decade. Investors now expect only one hike from the Fed by the end of the year. The rupee has gained strength on international markets.


Consumer inflation—the RBI’s chief indicator—has been particularly benign. The gauge, which is heavily influenced by food prices, slowed sharply in August thanks to good rainfall in recent months. Above-average rains have helped ease concerns over farm supplies.


Data published mid-September showed the benchmark consumer inflation rate declined to a six-month low of 5.05% in August, almost hitting the RBI’s 5% target for next March and building the case for more monetary easing by the central bank later this year. In July, consumer prices had grown 6.07%.

Cited by Bloomberg, Vivek Rajpal, an interest-rate strategist at Nomura Holdings said that lower bond yields won’t hold once the market moves past the first reaction to RBI’s rate cut. “To be sure, front-end rates will make newer low but the longer end will find it difficult to move much lower.” Cites RBI statement which says risks on inflation is tilted on the upside, though less so than what was expected in the policy statements in June and August.  As such, “market cannot assume another rate cut unless we start talking about downside risk to inflation.” Expects bonds to consolidate; see 10-year yields at 6.70-80 by end of December.

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