India's central bank lowers policy tax rates for the first time in nearly five years

The Reserve Bank of India lowered key interest rates for the first time in nearly five years on Friday as cooling inflation provided central banks with a room to stimulate the country's faltering economy.

The Monetary Policy Committee decided to lower the repurchase rate by 25 basis points to 6.25%, Reserve Bank of India Governor Sanjay Malhotra said in a live broadcast.

The rate of decline since May 2020 was generally expected when the country struggled with a recession in the pandemic recession.

The decision confirmed that central bank priorities “from including inflation to providing more support to the economy,” Shilan Shah, deputy emerging market economist at capital economics, said in a note.

“It's been relaxed further as the economy may keep its soft snacks in the softer quarters,” Shah said.

The central bank predicts real GDP growth rate of 6.7% and inflation of 4.2% in the next fiscal year. In the fiscal year ending March this year, the Reserve Bank of India reduced Real GDP to 6.4% – its worst in four years – downgraded from 6.6% in December, while inflation remained at 4.8%.

Indian stocks fell, with the benchmark Nifty 50 falling off as much as 0.5%. The yield on bonds in 10 years rose by more than 4 basis points to 6.7%.

In a unanimous decision, a six-member panel voted to keep the policy stance “neutral.” This is a surprise for some market observers who predict that they will turn to “adaptive” before the announcement.

Malhotra said that while the lows expected to resume growth as of the second quarter ended in September, it remains “much below last year’s level.”

“These growth dynamics provide MPC with policy space to support growth, while still focusing on aligning inflation with targets,” he added.

The benchmark repurchase rate has remained at 6.5% over the past two years, with inflation above the central bank's medium-term target of 4%.

After peaking in October, consumer price inflation in India has eased, down 6% within the central bank's tolerance limit, 5.22% in December and 5.48% in November.

Asia's third-largest economy has been declining sharply since last year, with growth of 5.4% in the quarter ended in September, a large expected margin and marking its slowest expansion in nearly two years.

As Rupee recorded lows on Greenback, any cuts in bank policy rates could cause a further rise in domestic inflation, putting further pressure on the currency and possibly triggering capital outflows.

After Friday's address, the Indian rupee strengthened the green guard by 87.47.

The Reserve Bank of India has reportedly taken intervention measures to intervene in the forex market to help cushion any sudden outflow of foreign capital and avoid a sharp decline in currency.