India central bank delivers surprise rate cut

Mumbai

INDIA'S central bank unexpectedly cut its benchmark interest rate in governor Shaktikanta Das's debut policy meeting, making it the first Asian central bank to ease borrowing costs this year.

The move is seen as a shift that provides more of the stimulus Prime Minister Narendra Modi's government needs to stoke growth as an election nears.

The repurchase rate was reduced by 25 basis points to 6.25 per cent, a decision predicted by just 11 of 43 economists surveyed by Bloomberg News. The six-member Monetary Policy Committee voted unanimously to switch its stance to neutral from "calibrated tightening" adopted in October.

The cut comes a week after Mr Modi's administration unveiled an expansionary budget, which included US$13 billion of help for consumers ahead of the poll that's due by May. Mr Das took office in December after Urjit Patel resigned as governor amid a heated public battle with the state, which led to questions about the central bank's independence from politics.

Mr Das pointed to slowdown in inflation for justifying the move. Officials also showed more concern about economic growth risks, paving the way for more rate cuts.

"It is vital to act decisively and in a timely manner to address the objective of growth once price stability as defined in the Act is achieved," Mr Das told reporters in Mumbai, referring to the central bank's inflation targeting mandate. "The shift in stance from calibrated tightening to neutral provides flexibility to address, and the room to address, sustained growth of India's economy over the coming months as long as inflation remains benign."

Inflation slowed to an 18-month low of 2.2 per cent in December, remaining well below the medium-term target of 4 per cent.

India "will now be looking at a balance of growth and inflation rather than just focusing on inflation alone," said Teresa John, an economist at Nirmal Bang Equities Pvt in Mumbai. "The rate cut is also driven by the fact that inflation has significantly surprised on the downside." BLOOMBERG