India’s Patel Leads New Panel to Cut Key Rate to 5-Year Low

By Sandrine Rastello for Bloomberg.

India’s new central bank Governor Urjit Patel led the country’s new Monetary Policy Committee to cut interest rates for the first time since April, against the forecast of most private economists.

Patel began his tenure with a quarter percentage point reduction in the benchmark rate, to 6.25 percent, bringing it to the lowest level in more than five years. The Reserve Bank of India’s new MPC — a signature initiative of Patel’s predecessor Raghuram Rajan — voted 6-0 in favor of the move, after “frank, often intense, but always friendly” discussion, Patel said.

The RBI’s new leader, who previously had a reputation as a hawk on inflation, cited a weakening global growth outlook and uncertainty about the U.S. presidential election at the start of a 15 minute press briefing on the decision. Lower borrowing costs will be welcomed by members of Prime Minister Narendra Modi’s administration, who have highlighted the view that inflation pressures are limited in the world’s fastest-growing major economy.

Tuesday’s move was predicted by 16 of 39 economists in a Bloomberg survey, with one seeing a cut to 6 percent and the rest no change. The rupee was little changed at 66.55 per dollar as of 3:54 p.m. in Mumbai, and the Sensex index of stocks was 0.3 percent higher. State Bank of India, a lender saddled with non-performing assets, outperformed with a 1.7 percent rise after Patel urged “firmness but pragmatism” in bad-debt clean-up efforts.

“This gives a very comforting feel to the market that inflation will remain subdued,” said Nikhil Johri, chief investment officer at Trivantage Capital Management India. “There is scope for one-to-two more rate cuts in the next six months. That will keep the market positive and buoyant.”

Key points from the RBI’s research department:

• See inflation at 5.3 percent in January-March 2017 from 5 percent the previous quarter; this includes the impact of pay increases for government employees and should ease to 4.5 percent a year later
• A potential increase in house rent allowances for civil servants risks spurring price pressures; concerns also stem from uncertainty surrounding the U.S. elections, crude prices and global demand
• Still see a 7.6 percent increase in gross value added — a key input of gross domestic product — for the year through March 2017, picking up to 7.9 percent the next year

India’s expansion slowed in the three months through June amid anemic investment and weakening consumption, complicating the outlook for Modi, who’s facing as many as seven state elections next year.

The country is also in the midst of geopolitical tensions after saying last week it attacked terrorist camps over the border in Pakistan, sending stocks and the rupee to their steepest drop in three months.

Still, the committee may face limited scope to offer additional monetary easing without stoking price pressures. While inflation slowed more than estimated in August, a pay increase for civil servants could make the improvement short lived, complicating efforts to meet the goal of 4 percent, plus or minus 2 percentage points.