RBI Cuts Key Interest Rate To Lowest In 9 Years, Eases Policy Stance

The Reserve Bank of India (RBI) cut its benchmark interest rate for a third straight time, and paved the way for more policy easing to support an economy growing at the slowest pace since 2014.

The repurchase rate was lowered by 25 basis points to 5.75 per cent, the lowest in nine years, as predicted by 31 of 43 economists surveyed by Bloomberg News. The six-member Monetary Policy Committee voted unanimously for a rate cut. It also switched to an accommodative bias from a neutral stance adopted in February.

"Growth impulses have weakened significantly,'' the central bank said in a statement Thursday, while cutting its growth forecast for the current fiscal year to 7 per cent from 7.2 per cent seen in April. With inflation below the central bank's medium-term target, "there is scope for the MPC to accommodate growth concerns by supporting efforts to boost aggregate demand."

The rate cut offers the support Prime Minister  Narendra Modi needs to boost economic growth by reviving domestic consumption and investments as he starts his second term in office. The easing is in line with global monetary policy turning looser, as the Federal Reserve shifts to a more dovish stance.

"A sharp slowdown in investment activity along with a continuing moderation in private consumption growth is a matter of concern," the central bank said.

Latest high-frequency indicators from auto sales to air travel show consumer demand is waning in India, amid a crisis in the shadow banking sector that's curbed lending. Any shortfall in the monsoon, which waters more than half of India's farmland between June and September, is an added risk to growth.

While Modi has limited headroom for fiscal stimulus, subdued inflation -- at 2.9 per cent in April -- allowed monetary policy makers space to bolster the economy. Gross domestic product growth slowed to a five-year low of 5.8 per cent in the three months to March.