The Reserve Bank of India (RBI) has cut its key lending rate in line with expectations and, in doing so, has reduced interest rates in the country to the lowest level in five years.
The decision means that the RBI’s repo rate – the level at which the central bank lends to commercial banks – now stands at 6.5 percent, down from 6.75 percent. The cut is also the central bank’s first since September of last year, though analysts expect more cuts will follow if prices continue to slow.
Having grown accustomed to spiralling inflation rates in recent times, a subdued commodities outlook has had the welcome effect of keeping domestic prices at a manageable level. After rising for six consecutive months, retail inflation measured by the CPI fell in February after a greater-than-anticipated slump in vegetable prices.
“Inflation has evolved along the projected trajectory and the target set for January 2016 was met with a marginal undershoot”, said the Governor of the RBI, Raghuram Rajan, in a policy statement. According to the bank, retail inflation is expected to decelerate modestly and keep close to the five percent mark for the remainder of the fiscal year, albeit with small quarterly variations.
“After two consecutive years of deficient monsoon, a normal monsoon would work as a favourable supply shock, strengthening rural demand and augmenting the supply of farm products that also influence inflation”, said Rajan. “On the other hand, the fading impact of lower input costs on value addition in manufacturing, persisting corporate sector stress and risk aversion in the banking system, and the weaker global growth and trade outlook could impart a downside to growth outcomes going forward.”