India’s central bank dropped its benchmark policy rate by an excessive amount, bringing it from 6% to 5.5%, the lowest level since August 2022.
This also represents a third consecutive rate drop since February; it falls below the median projection of 5.75% in a poll.
According to RBI Governor Sanjay Malhotra on a livestream, the action was done as inflation had notably dropped and growth has been “lower than our aspirations amid a challenging global environment and increased uncertainty.”
Following a better-than-expected GDP growth number in its fiscal fourth quarter—the economy is expanding 7.4% year-on-year instead of the 6.7% projected by analysts.
Still, the central bank maintained its full-year GDP forecast at 6.5%, a notable decline from the 9.2% recorded in the previous financial year, which concluded in March.
“The Indian economy presents a picture of strength, stability and opportunity,” said Malhotra.
In its past meetings under American tariff threat, the RBI has underlined development issues.
Separately, the RBI has space to lower rates since India’s inflation is mainly on a down trend.
At 3.16%, the most current headline inflation figure for April was lowest level since July 2019.
Down from its previous estimate of 4%, the RBI had changed its inflation projection to 3.7% in the current financial year; Malhorta stated that inflation might undershoot the objective.
Most forecasts, he said, indicate ongoing moderation in the pricing of important commodities including crude oil.
The central bank would still be alert of weather-related uncertainty and changing tariff-related issues with their influence on world commodities prices, Malhotra said.
The RBI said that given the outsized fall in the policy rate, there is limited space for monetary policy to assist growth and will modify its monetary policy stance to “neutral” from “accommodative.”
“From here onwards, the [Monetary Policy Committee] will be carefully assessing the arriving data and the evolving outlook to chart out the future course of monetary policy in order to strike the right growth-inflation balance,” the RBI governor added.
