What RBI’s steep rate-cut signals

After Friday’s decision, the repo rate now stands at 5.5%, the lowest it has been since August 2022 when it was at 5.4%.

New Delhi: New Delhi : The Reserve Bank of India (RBI) surprised markets by frontloading its monetary easing with a 50-basis point rather than the consensus 25-basis point repo rate cut on Friday. One basis point is one hundredth of a percentage point. By changing the policy stance from accommodative to neutral, it has also sent a signal that there could be no more rate cuts in the near-term. What explains these decisions by the central bank? What do they

RBI Governor Sanjay Malhotra (PTI)

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See Chart 3: RBI growth and inflation projections

Rate cuts boost and markets sentiment but do not necessarily lead to higher growth

While a repo-rate cut means that the MPC is pivoting towards the growth side of its mandate of balancing growth and inflation, and is perfectly justified in the current environment, it does not guarantee a higher growth rate. India saw this in the period before the pandemic when lower repo rates were accompanied by a slowdown in GDP growth for a few years. This only means that growth rate is an outcome of various factors and only weakly correlated with interest rates in the economy. It remains to be seen whether this monetary easing cycle manages to achieve its goal of boosting growth. To be sure, one could always argue that the growth performance could have been worse had interest rates not been reduced.

See Chart 4: Scatter plot of repo rate and GDP growth