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Investors Cheer Reserve Bank of India Rate Cut

Urjit Patel’s first major decision as central bank governor was to cut interest rates by 25 basis points, to 6.25 percent, the lowest level since 2011. Indian stocks rallied shortly after the news broke, signalling the market’s general approval. With the Consumer Price Index (CPI) trending downwards, from 6.07 percent in July to 5.05 for the month of August, a rate cut was widely expected, and adds to the list of catalysts that are currently boosting the world’s fastest-growing major economy.

In a country that is ushering in a raft of structural reforms to help stimulate even further growth, this monetary policy announcement will go down in history as the first meeting where an interest rate decision was made by a panel, as opposed to an individual, that is, the Reserve Bank of India’s (RBI) chief. Adopting a six-member Monetary Policy Committee (MPC) is an important step towards more orthodox central banking policies and also reduces the risk that a single governor can be pressured by the government on future interest rate decisions.

The RBI has cut its key benchmark repo rate by a total of 175 basis points since January, 2015, over which time the BSE Sensex Index has touched record highs.

Bloomberg Business, India Lowers Rates in First Decision by New Monetary Panel, October 4, 2016.
Firstpost, Reserve Bank of India monetary policy tomorrow: Why Urjit Patel will be watched beyond interest rates, October 3, 2016.

 

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