India’s central bank has pulled off the biggest market shock yet with an out-of-the-blue move. Most notably, it cut its benchmark policy rate preemptively by 50 basis points. The resulting policy rate is now 5.5%, its lowest level since August 2022. This decision comes as the Reserve Bank of India (RBI) aims to stimulate growth amid a backdrop of declining inflation.
The most recent headline inflation reading for April came in at 3.16%, the lowest level since July of 2019. The sharp decline in inflation gives the RBI room to get more aggressive on rate cuts. This move, they say, is in concert with their long-term plan to increase economic development. It has been the bank’s third consecutive rate cut since February. This increase is an important recognition on their part of just how much the economic landscape has changed.
Economists had predicted a much less dramatic drop. According to their median estimates pulled from a Reuters poll, they forecast a benchmark rate of 5.75%. Still, the RBI’s move signals deeper cuts are on the table, a sign of a more hawkish posture given the economy’s troubling state. The central bank is maintaining its 6.5% full-year GDP forecast. This decision is taken even with a major deceleration from last year’s 9.2% growth. That’s astonishing given that last fiscal year ended in March, making the turnaround in economic fortunes all the more stark.
The economy grew 7.4% year on year in the fiscal fourth quarter, well ahead of economists’ forecast of 6.7%. The GDP growth surprised positive on the high side. This robust performance strengthens the RBI’s hand on its recent cut of the repo rate, with the goal of developing a more conducive environment for investment and consumption.
With India’s inflation on a pronounced downtrend, the RBI was given the headroom to add some more cautiousness to monetary easing. Inflation is moderating and the central bank is doing its job by trying to increase economic activity. These efforts are important for promoting consumer confidence and spending, the key to sustained growth.