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Economist at UOB Group Barnabas Gan assessed the recent interest rate decision by the Reserve Bank of India (RBI).

Key Quotes

“The Reserve Bank Of India (RBI) had cut its benchmark interest rate for the fifth time this year, making it the most aggressive Asian central bank to ease monetary policy in the face of slowing macroeconomic environment”.

“The MPC continued to maintain its accommodative stance which was first iterated in June, and highlighted the need to ease policy with the objective of achieving the “medium-term target for CPI inflation of 4% within a band of +/- 2% while supporting economic growth”.

“RBI has also cut its full-year economic growth outlook to 6.1%, down from the previous estimate of 6.9%, citing the softening global economic activity and domestic indicators seen year-to-date”.

“The central bank also highlights that while monetary transmission from the previous rate cuts has remained ‘staggered and incomplete’, it expects the past cuts to gradually feed into the real economy and boost demand. While we believe that rate cuts could potentially spur domestic consumption (which accounts for over 50% of GDP), the underlying softness in India’s automotive industry and the overall lacklustre external environment are growth drags that are relatively exogenous in nature”.

“Given the ongoing economic slowdown and benign inflation outlook, we now see RBI to reduce interest rate by another 25 basis points in its upcoming December meeting. This would bring the repurchase and reverse repurchase rate to 4.90% and 4.65%, respectively by the end of the year. While RBI appears to be the most aggressive Asian central bank to cut rates this year, it also has a relatively larger policy space to do so given that its historical low was 4.75% (clocking a collective cut of 175 basis points then) during the Global Financial Crisis period of 2009. All-in-all, we keep our full-year GDP and CPI outlook unchanged at 6.0% and 3.2%. respectively”.