India central bank delivers first rate cut since 2020

FILE PHOTO: A worker walks past the logo of Reserve Bank of India (RBI) inside its office in New Delhi, India July 8, 2019. REUTERS/Anushree Fadnavis/File Photo

Mumbai, India — India’s central bank cut interest rates Friday for the first time in nearly five years, as concerns over a growth slowdown in the world’s fifth largest economy outweighed inflation risks.

The Reserve Bank of India (RBI) said the benchmark repo rate, the level at which it lends to commercial banks, would be reduced by 25 basis points to 6.25 percent.

While major central banks around the world cut rates last year, with some continuing to do so, lingering inflation prevented India’s from following suit.

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Retail inflation in the country has cooled recently, coming in at a four-month low of 5.22 percent in December, but still remains above the central bank’s medium-term target of four percent.

Easing price pressure now appears to have provided room to focus on boosting growth.

India’s economy expanded much slower than expected in the September quarter, owing to sluggish manufacturing and tepid urban consumption.

It is now forecast to expand this fiscal year at its slowest pace since the Covid-19 pandemic, having grown more than eight percent last year.

RBI governor Sanjay Malhotra, in his first monetary policy review, said that inflation was “expected to further moderate in 2025-26” and that, while growth would recover from its September quarter lows, it was still “much below” last year.

“Considering the existing growth-inflation dynamics… a less restrictive monetary policy is more appropriate at the current juncture,” Malhotra said.

Malhotra has taken a less hawkish approach than his predecessor Shaktikanta Das, who hiked rates 2.5 percentage points between May 2022 and February 2023 to battle inflation.

The bank last cut them in May 2020.

The RBI’s decision comes less than a week after the government unveiled sweeping income tax cuts in its annual budget, looking to put more money in the hands of consumers reeling from high food prices and weak wage growth.

India’s economy grew 5.4 percent in the September quarter, its worst performance in seven quarters and lower than analyst expectations of 6.5 percent.

While the reading still places India among the world’s fastest-growing major economies, it indicates a moderation in the breakneck pace of expansion seen for much of 2023 and 2024.