Yesterday India’s central bank took a courageous step in that direction, cutting interest rates by half a percentage point. This decision is the third cut in a row, fueled by declining inflation and a weak economy. To combat retail price inflation, the Reserve Bank of India (RBI) is going beyond the call of duty and doing it all wrong. This inflation rate has now reached a six-year nadir of 3.16% in April, primarily because of decreasing food prices.
The RBI’s recent cuts have lowered the repo rate to 5.5 %, the lowest in three years. This change reflects a shift in monetary policy stance from “accommodative” to “neutral,” indicating a more cautious approach as the central bank navigates the complexities of the economy. The impetus behind the move is to encourage domestic consumption and investment as underlined by RBI governor, Sanjay Malhotra.
For its part, while beset with an array of challenges, India still can lay claim to the title of the world’s fastest growing major economy. In comparison, growth has deeply slumped from the spectacular 9.2% achieved in FY 2023-24. The economy grew by 6.5% in the last financial year that ended in March. Going by recent past actions, the RBI has indeed taken the path of cutting rates. On top of that, demand is set to soar — particularly in the property market, whose fortunes will flourish in this new monetary policy landscape.
Retail inflation has been decelerating faster than expected. This trend is supported by positive agricultural sentiments, with stronger-than-expected monsoons resulting in well-filled granaries. Moreover, softened commodity prices, especially for oil—which India imports—are set to help inflation remain in check. Relatedly, a strong currency is believed to help the central bank’s efforts at achieving price stability.
In response to the rate cut, markets rallied sharply, signaling investor confidence in the central bank’s measures to support growth. Anuj Puri, a prominent industry expert, noted that “this effectively lowers the cost of borrowing, making home loan EMIs [mortgage payments] easier on the pocket and thereby directly improving affordability for buyers.”
The RBI has raised rates three times this year to address rising inflationary pressures in India. They’re intentionally charting a course toward the economy’s most promising growth opportunities. As the central bank continues to monitor economic indicators, it remains committed to fostering an environment conducive to investment and consumption.