India will move to its first policy rate cut in nearly five years

India’s central bank could potentially cut benchmark interest rates at its ongoing policy meetings. This eases inflation and has room to stimulate the economy despite the rupee being covered by low records.

DBS Bank Chief Economist Taimur Baig said the Reserve Bank of India will close its policy meeting on Friday and will be poised to raise 25 basis points to 6.25% at 25 basis points to conclude a “shallow rate reduction cycle.” I am.

Indian bonds have been gathering in recent weeks, with 10-year benchmark yields falling to 16.5 basis points in roughly three weeks on Wednesday to 6.664%, with interest rates at the February meeting Because traders are increasing bets to cut back.

If the RBI is low, it will be the first reduction in nearly five years. The central bank last cut interest rates in May 2020 as the country fought the slump that affected the Covid-19 pandemic.

Investors will also scrutinise the statement of new RBI governor Sanjay Malhotra to assess the bank’s monetary policy direction. Malhotra was in charge in December.

“It will be interesting to see whether the RBI will continue the governor’s statement, except for the monetary policy statement, as a tool for policy communication,” Goldman Sachs said.

Wall Street banks are forecasting a quarterly percentage cut this week, with a financial policy shift from “neutral” to a loose, “adjustable” stance. I also applied a pencil with an additional 25 strips in April.

The benchmark repo rate has remained stable at 6.5% over the past two years, as domestic inflation rates exceeded the central bank’s medium-term target of 4%, violating the 6% resistance limit of RBI in October.

“The delay in implementing universal tariffs by the new US administration will provide tactical space for the RBI to prioritize domestic growth and reduce policy rates,” said India. Rule Bajoria, economist at Bank of America, said:

Softer inflation measures also provided RBI rooms at lower rates at the first policy meeting after Malhotra was in charge of a three-year term.

His predecessor, Shaktikantadas, had maintained a stable interest rate for almost two years towards the end of the six-year stint.

At RBI’s latest monetary policy meeting in December, the pricing panel cut 50 basis points to 4.0%, effectively easing financial terms, while not changing key interest rates in the split decision. did.

The new senior monetary policy leadership “not only gives the MPC a fresh look, but perhaps a different approach,” Bajoria said.

Malhotra remains quite closed to his financial policy views, but in his December financial stability report acknowledged that inflation and the possibility of flexibility in financial policy is a positive development.

The governor also warned that the medium-term economic outlook remains challenging, citing risks such as rising geopolitical conflicts and financial market disruptions.

He reportedly ordered a review of the central bank’s inflation and growth forecasting tools to minimize forecast errors.

The weakening of the rupee has made it difficult to relax monetary policy. The rupee has been steadily decreasing against the stronger dollar, down 3.6% from the dollar since early November.

As the rupee hits a record low against the greenback, a cut in bank’s policy rate could lead to further rise in domestic inflation, putting more pressure on the currency and causing capital outflows.

The RBI acted to implement substantial interventions in the foreign exchange market to ease the potential sudden outflow of foreign capital and help avoid a sharp decline in currency.

“The level of volatility in which the intervention was conducted appears to have changed more rapidly,” Bofa’s Bajoria said, “While weak rupees can affect timing, it would reverse the need for policy support. There’s none,” he added.