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India's new central bank chief delivers surprise rate cut ahead of election

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The Reserve Bank of India said the benchmark repo rate - the level at which it lends to commercial banks - would be reduced by 25 basis points to 6.25 per cent.

[MUMBAI] India’s central bank unexpectedly cut its benchmark interest rate in Governor Shaktikanta Das’s debut policy meeting, becoming the first in Asia to ease borrowing costs this year as inflation remains benign.

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, with the rest expecting no change. The six-member Monetary Policy Committee voted unanimously to switch its stance to neutral from ‘calibrated tightening’ adopted in October.

The new governor and his board were emboldened by inflation, which slowed to an 18-month low of 2.2 per cent in December, well below the Reserve Bank of India’s medium-term target of 4 per cent.

“Headline inflation is expected to remain contained below or at its target of 4 per cent,” Mr Das told reporters in Mumbai. “This has opened space for policy action.”

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With the US Federal Reserve signaling a pause in its rate-hike cycle, emerging markets from India to Indonesia are getting a breather as global risks mount. The Bank of Thailand kept its key rate unchanged on Wednesday after hiking in December, while the Philippines is also set to hold later today.

Developed economies too are altering stance, with the Reserve Bank of Australia governor this week shifting to neutral.

FISCAL STIMULUS

Indian bonds gained, and the rupee declined 0.2 per cent immediately after the rate move. The currency later reversed losses and was up 0.2 per cent to 71.3925 as of 12:30pm in Mumbai.

Mr Das, a career bureaucrat who was hastily installed as government after Urjit Patel quit in December, was one of four MPC members who voted for a cut, while two called for no change. The monetary stimulus is what Prime Minister Narendra Modi’s government needs to stoke economic growth, after it unveiled an expansionary budget last week, which included US$13 billion of consumer stimulus ahead of an election.

“The MPC 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.”

Falling food prices have been the main driver of the inflation slowdown, though the core measure - which excludes food and fuel costs - remains elevated at around 6 per cent. The central bank sees inflation at 2.8 per cent in the final quarter of the fiscal year ending March. Previously, it had projected inflation in a range of 2.7 per cent to 3.2 per cent in the six months to March.

The decisions are in line with achieving the medium-term inflation target, while supporting growth, the central bank said in a statement on Thursday. The central bank is forecasting gross domestic product growth of 7.4 per cent for the fiscal year starting April 1, the same as its estimate for the current year.

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