The Reserve Bank of India has cut its interest rate for the third time in a year in order to boost its growth as Asia’s third largest economy.
The central bank has cut the level which the RBI lends to commercial banks to 7.25%. This move was not unexpected as the bank cut interest rates in both January and March.
The Indian economy grew by 7.5% in the first quarter which puts it ahead of China as the fastest-growing major economy.
Despite the evidence of strong growth, analysts have signalled there are other economic indicators which suggest weaknesses in India’s economy. Other recently released data shows that consumers are not optimistic about the economy.
Commenting on their recent cuts, the Indian central bank said “with low domestic capacity utilisations, still mixed indicators of recovery, and subdued investment and credit growth, there is a case for a cut in the policy rate today.”
Atop of this, the consumer price inflation hit a four-month low of 4.87% in April, which was comfortably within the target range of 2-6%. This, therefore, gave sufficient room for rates to be eased.
An economist at ICICI Securities Primary Dealership has told Reuters that the RBI plans to wait for more inflation data and clarity of risks before taking more actions.
The central bank have said they will track the inflation data and watch for the risks to food prices if the monsoons rains are weaker than anticipated, global oil prices and the weakening of the local currency in a volatile market.
Analysts expect the RBI will not make any further cuts until December.