The Reserve Bank of India took analysts by surprise with the announcement that it had cut interest rates for the fourth time this year.
Inflation this August clocked in at a record low 3.6 percent
Of a 52-strong sample of economists polled by Bloomberg, only one correctly predicted the move – whereas 42 expected a quarter of a percentage point cut and the remaining nine forecast no change. The 50 bps reduction follows reductions in January, February and June of this year and means that the bank’s repo rate stands at 6.75 percent currently, its lowest in four and half years.
“Since the third bi-monthly statement of August 2015, global growth has moderated, especially in emerging market economies (EMEs), global trade has deteriorated further and downside risks to growth have increased,” according to the bank’s latest assessment. “In India, a tentative economic recovery is underway, but is still far from robust.”
Global growth is less than it was this this time last year and falling commodity prices mean that India must look to domestic growth and investment if it is to keep inflation close to its expectations. Inflation this August clocked in at a record low 3.6 percent, and sources at the bank are hoping that the cuts will boost investment and domestic spending both.
The emphasis on the repo rate suggests that the Reserve Bank of India feels commercial banks will be of vital importance in kick-starting the country’s economic performance. Looking at the period through April to June, India’s annual rate of economic growth slowed to seven percent, significantly less than the 7.5 percent rate posted in the quarter previous.
