India’s central bank cut its policy interest rate by 25 basis points on Thursday in a widely expected move to boost the economy just a week before voting begins in an election that will decide whether Prime Minister Narendra Modi gets a second term or not.
Following a meeting of its Monetary Policy Committee (MPC), the Reserve Bank of India highlighted the need to boost domestic growth due to headwinds “on the global front”.
“The need is to strengthen domestic growth impulses by spurring private investment which has remained sluggish,” the RBI wrote in the policy statement.
The six-member MPC cut the repo rate to 6.00 per cent as predicted by 57 of 67 analysts polled by Reuters last week. The revised repo rate was reduced to 5.75 per cent.
Four out of six MPC members voted for a 25 basis points cut, while two called for the rates to remain unchanged.
Five of them called for the policy stance to remain “neutral”, while one MPC member voted for it to be changed to “accommodative”.
While the central bank projected retail inflation at 3.8 per cent by January-March 2020 – within its target of four per cent – it also warned of the upside risks to price pressures if food and fuel prices rose abruptly or if fiscal deficits overshot targets.
With voting in the general election staggered over several weeks, the result will only be known on May 23 and uncertainty over which party will lead the next government has complicated the RBI’s task.
The major parties made promises for heavy spending during their election campaigns, leaving the central bank unsure how fiscal plans will pan out.
“Should there be a fiscal slippage…this could crowd out private investment, impact potential output and result in higher inflation,” the RBI said in a separate monetary policy report.
Speaking at an industry event, Finance Minister Arun Jaitley said that the government would continue with fiscal consolidation and pursue policies to enable further reduction in interest rates if it was re-elected.