India’s central bank cuts interest rate to give growth a chance

• This is India's first rate cut in 18 months.
  
• Furthermore, the central bank changed its stance to “neutral”, indicating a possibility of another rate cut in the next few months.
  
• After retail inflation crashed to a 18-month low in December 2018, it was widely expected that the RBI would have enough leeway to cut rates this month.

The Reserve Bank of India (RBI) opted to cut interest rates by 25 basis points to 6.25%. Furthermore, the central bank, which is now headed by government insider Shaktikanta Das, changed its stance to “neutral”, indicating a possibility of another rate cut in the next few months.

Markets had already run up on Wednesday hoping for this slash in interest from the RBI. Benchmark indices, Sensex and Nifty, continued to hold on to the gains after the decision.

After retail inflation crashed to a 18-month low in December 2018, it was widely expected that the RBI would have enough leeway to cut rates this month after having to hike rates consecutively in June and August last year and maintaining a “calibrated tightening” stance in December.

However, the Modi administration’s expansionary budget put a question mark around those plans. A cash handout scheme for farmers, a pension scheme for informal sector workers and tax breaks for the middle class have raised the probability of fiscal slippage. The stimulus package was expected to have an inflationary effect, which is why many thought that the RBI would opt for a wait-and-see approach.

In June 2018, the central bank hiked rates for the first time in four years in response to higher inflation and a depreciating rupee - both of which were a outcome of rising fuel prices.

The last time the RBI opted for monetary tightening was in January 2014, when it increased the repo rate to 8% to keep inflation in check. It had since reduced interest rates to support economic growth amid a global decline in oil prices.

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