According to Fitch Ratings Reserve Bank of India (RBI) is the first central bank in the Asia-Pacific (APAC) region to begin explicit interest rate easing cycle buoyed by benign food inflation and easier global financial condition.
RBI Rate Cuts
Monetary Policy Committee (MPC), headed by RBI Govenor Shaktikanta Das had cut rates in February and April 2019, citing prospects of benign inflation. In the four months of 2019, RBI has cut policy interest rates twice by 0.25% each to one-year low of 6%. This was first back-to-back rate cut since MPC was formed in late 2016.
Reasons for explicit easing cycle
Benign food inflation and easier global financial conditions following US Fed’s shift to a more dovish policy stance. Inflation at 2.9% has remained within RBI’s comfort zone of 4 per cent (+/- 2 per cent).
Fitch predicts that RBI may look for opportunities for further easing. But, modest fiscal slippage, relative to central government’s targets in recent years, has resulted in a stalling of fiscal consolidation. Election Campaign promises to support farmers’ incomes, including direct cash transfers after elections, will add to spending pressures in the current financial year.
Fitch has rated ‘BBB-’ on India, the lowest investment grade rating, with stable outlook. According to it, India’s ratings balance strong medium-term growth outlook and relative external resilience, with strong foreign reserve buffers, against high public debt, financial sector fragilities, and some lagging structural factors.