RBI Likely To Lower Interest Rates

A year ago, India had Asia’s fastest growth and inflation. Then Prime Minister Narendra Modi took away most of its money and both indicators slowed, bolstering expectations the central bank will cut borrowing costs for a final time this cycle as pressure mounts for a stimulus.

The Reserve Bank of India’s six-member monetary policy committee will lower the repurchase rate to 6 percent from 6.25 percent, according to 39 of 55 economists in a Bloomberg survey before Wednesday’s announcement. The rest see no change. The reduction would bring the benchmark rate to the lowest since 2010 and mark a U-turn from just six months ago, when Governor Urjit Patel jettisoned an accommodative bias for a neutral policy setting.

Consensus has built for a cut because it’s seen as Patel’s last chance through 2018 to spur the economy before the U.S. Federal Reserve reduces its balance sheet, forcing emerging markets to keep pace. India’s record-low inflation is also flattered by last year’s prices and low global food costs, which are expected to reverse in coming months.

Consumer prices rose 1.5 percent in June, below the RBI’s April-September forecast range of 2 percent to 3.5 percent. It will end 2017 around the medium-term target of 4 percent, according to the median estimate in a Bloomberg survey. Economists also reduced their growth projections for the previous quarter as loan-growth hovers near a record low and job losses mount after PM Modi last year surprisingly scrapped 86 percent of currency in circulation.

Earlier this month, PM Modi’s top economic adviser Arvind Subramanian said India was undergoing a “paradigm shift” in prices and called upon policy makers to reflect “very, very, carefully” upon June’s unprecedented inflation and soft industrial output. There were also signs of dissent within the MPC, with one member breaking ranks for the first time to urge a sharp 50 basis point cut.

The RBI withdrew 200 billion rupees on July 6 and July 20 through open-market operations and announced more for August. It has also been using regular tools to drain funds and move to neutral liquidity from a surplus.

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Source:Ndtv

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