Mumbai: The Reserve Bank of India (RBI) on Thursday unexpectedly lowered interest rates and as anticipated, shifted its stance to "neutral" from "calibrated tightening" to boost a slowing economy after a sharp fall in the inflation rate.
The cut in borrowing costs in Asia's third-biggest economy comes as the economy stutters and other central banks, most notably the Federal Reserve, have sounded increasingly cautious about the global outlook.
The rate cut will benefit Modi's government as it will boost economic growth and lending to small businesses, according to Ashwani Mahajan, a leader of the economic wing of the powerful Hindu nationalist group, Rashtriya Swayamsevak Sangh, which is the fountainhead of the BJP.
While four members of the MPC including Das voted for a rate cut, RBI deputy governor Viral Acharya and independent member Chetan Ghate, a professor at the Indian Statistical Institute were in favour of maintaining a status quo on rates.
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There have been signs that Modi's support has crumbled in parts of a countryside that supported his Hindu nationalist Bharatiya Janata Party (BJP) in the last election in 2014. The repo rate is the rate at which the central bank lends short-term money to the banks. The Federal Reserve has changed direction, and now many analysts expect no United States rate hikes this year, after four in 2018.
The rupee weakened to 71.69 to the dollar immediately after the announced but strengthened soon after to 71.42.
It marked the first interest rate decision under new bank chief Shaktikanta Das, an ally of Modi who was appointed in December after his predecessor, Urjit Patel, quit following a public spat with the administration over alleged government interference.
The last rate cut was announced in August 2017 and was followed by two hikes of 25 bps each previous year.
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Banks have also been given greater operational freedom to offer interest rates to bulk deposits, raising the definition of "bulk deposits" to Rs 2 crore from Rs 1 crore now.
"Over the next 12 months, if we see that inflation remains at 3.9 per cent, maximum of 4 per cent or below, then I think there is room to act", Das said. India raised its fiscal deficit projections for the year 2018-19 to 3.4 per cent of the gross domestic product from the previously estimated 3.3 per cent. "The macro backdrop as such supports the RBI's stance", said Mendiratta.
Economic growth fell to a worse-than-expected 7.1% in the July-September quarter from 8.2%, dragged down by slower consumer spending and farm growth, below analysts forecast for a 7.4% increase.
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