Benign inflation, anticipated slack delivered Dec cut

India's monetary policy committee decided to lower the repo rate by 25 basis points (bps) in December on the back of benign inflation and emerging signs of weakness, even as the growth surprised with a stronger-than-expected GDP print in the second quarter.

- Shayan Ghosh

"Considering the benign inflation outlook—headline as well as core—real interest rates need to be lower. Therefore, I vote for a 25-bps rate cut," said Reserve Bank of India (RBI) governor Sanjay Malhotra, who also heads the rate-setting panel, according to the minutes of the meeting released on Friday.

The cut, he said, will also stimulate demand and support growth. "Moreover, I am in favour of retaining the neutral stance which gives the requisite flexibility to remain data-dependent and act according to the evolving macroeconomic conditions and outlook," said Malhotra.

According to Malhotra, demand pressures, as evident from low core inflation (excluding precious metals), are minimal and projected to remain low in the next three quarters.

While announcing the rate cut on 5 December, the RBI governor had said that while growth remained resilient, it is expected to soften somewhat. High-frequency indicators, he said, suggest that domestic economic activity is holding up in Q3, although there are some emerging signs of weakness in a few leading indicators.