(Bloomberg) — India’s central bank lowered interest rates in an unscheduled move for the second time this year, a sign of approval for Prime Minister Narendra Modi’s first full-year budget.
Governor Raghuram Rajan cut the benchmark repurchase rate to 7.5 percent from 7.75 percent, the Reserve Bank of India said in a statement on Wednesday. The central bank acted due to weakness in the economy and after it agreed upon a formal inflation target with the government, Rajan said.
“This makes explicit what was implicit before –- that the government and the Reserve Bank have common objectives and that fiscal and monetary policy will work in a complementary way,” Rajan said in the statement, referring to the monetary policy framework agreement. “In sum, then, the government intends to compensate for the delay in fiscal consolidation with a commitment to an improvement in the quality of adjustment.”
The decision came four days after Modi pushed back deficit targets to spur economic growth through corporate tax cuts and increased spending on infrastructure. More than a dozen central banks from Turkey to China have eased policy in 2015 as a slide in oil prices damps inflation.
Indian stock-index futures erased its losses after Rajan’s decision. The index trading in Singapore rose 1.3 percent as of 11:28 a.m. in Singapore.
‘Quite Surprised’
The move comes as a surprise to economists at BNP Paribas SA and Standard Chartered Plc, who said a rate cut before the next scheduled policy review on April 7 would be unlikely. Twelve of 15 economists surveyed by Bloomberg News after the Feb. 28 budget predict Rajan will reduce the benchmark repurchase rate only in April. Three saw the possibility of a cut this month.
“I’m quite surprised by the fact they cut rates right after the budget — I thought the wider budget deficit would discourage them,” said Dariusz Kowalczyk, an economist with Credit Agricole CIB in Hong Kong. “This is a very welcome move from the perspective of the government and from the perspective of achieving strong growth this year.”
The RBI will seek to bring the inflation rate “to the mid-point” of the inflation target of 4 percent plus or minus 2 percent by the end of a two-year period starting in the fiscal year through March 2017, Rajan said.
Deficit Target
“Further monetary actions will be conditioned by incoming data, especially on the easing of supply constraints, improved availability of key inputs such as power, land, minerals and infrastructure, continuing progress on high-quality fiscal consolidation, the pass through of past rate cuts into lending rates, the monsoon outturn and developments in the international environment,” Rajan said.
Interest-rate swaps show that investors are betting that India will cut interest rates by about 75 basis points by the end of 2015, the steepest decrease after Turkey among 14 emerging markets tracked by HSBC Holdings Plc.
Rajan’s move follows an agreement with the finance ministry to amend the RBI Act to form a monetary policy committee that will aim to keep inflation below 6 percent. Before the budget, Rajan said he would look for the government to rechannel “mistargeted” spending toward supply-enhancing infrastructure.
“The fiscal consolidation program, while delayed, may compensate in quality, especially if state governments are cooperative,” Rajan said in the statement. “Given low capacity utilisation and still-weak indicators of production and credit off-take, it is appropriate for the Reserve Bank to be pre-emptive in its policy action to utilize available space for monetary accommodation.”
Finance Minister Arun Jaitley aims to narrow the budget deficit to 3.9 percent of gross domestic product in the year starting April 1, the smallest gap since 2008 though higher than a previous goal of 3.6 percent. The space will be used to fund infrastructure, he told lawmakers on Feb. 28.
Rajan had left rates unchanged at a Feb. 3 review after an unscheduled reduction in January. Consumer prices rose 5.11 percent in January under a revised method to calculate the data, less than Rajan’s 6 percent target for January 2016. -BLOOMBERG
