Business

India's central bank cuts interest rates

Reserve Bank of India governor Urjit Patel Image copyright Reuters
Image caption This was the first rate decision since Urjit Patel took over as governor of the Reserve Bank of India

India's central bank has cut a key interest rate to its lowest level for nearly six years, in an effort to boost the economy.

The bank cut its benchmark repo rate to 6.25% from 6.50%.

This was the first interest rate review under the new governor of the bank, Urjit Patel, who took over last month.

While Mr Patel's predecessor was in sole charge of rate setting, this latest cut was decided by the newly formed monetary policy committee.

The Reserve Bank of India did not say how members of the six-strong committee voted.

Mr Patel replaced Raghuram Rajan, who announced he was stepping down earlier this year.

He is known to take a tough line on inflation, which remains one of the big worries in the Indian economy.


Analysis: Sameer Hashmi, India business reporter

The monetary policy meeting was a much-awaited event for the markets for several reasons.

It was Urjit Patel's maiden press conference after taking charge of India's central bank. And secondly, for the first time a six-member committee decided on interest rates rather than the RBI governor alone. The fact that all of them voted unanimously for a rate cut signals a good start for the new decision-making committee.

Interestingly - more than the rate cut - the bigger surprise of the day was the short duration of the press conference, during which Mr Patel took just five questions. This was a stark change compared with previous governors, who would talk to the press for a much longer period.

Many see this as a signal that he wants to keep a low profile, unlike his predecessor, Raghuram Rajan, who was known for his frank interactions and statements.


'Window of opportunity'

Shubhada Rao, chief economist of Yes Bank in Mumbai, said the cut was "along expected lines".

"That dominant pressure on headline inflation, mainly food, has begun to ease rapidly, which paved way for the 25 bps rate cut today."

Abheek Barua, chief economist at HDFC Bank in New Delhi agreed there had been a "window of opportunity" to cut rates.

"The sooner they did it the better. I am happy that they did it," he said.

"In fact, unless the pay commission payouts and HRA (House Rent Allowance) allowances, lead to a pick-up in inflation, I think there's room for another rate cut between now and the end of the year."

Consumer inflation fell to a five-month low of 5.05% in August, against the monetary policy committee's target of between 2% and 6%.

It is expected to keep falling in the coming months, following a good monsoon season which brought down food prices.

The committee has been given the task of "maintaining price stability" while also "keeping in mind the objective of growth".

India is one of the fastest expanding economies in the world, even though growth eased back to an annual pace of 7.1% in the March to June quarter, down from 7.9% in the previous three months.

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