India’s central bank just cut interest rates for the second time in two months, giving the slowing economy a shot in the arm days before national elections.
The Reserve Bank of India (RBI) lowered its main rate from 6.25% to 6% on Thursday, citing a slowdown in the economy at home and abroad.
India’s gross domestic product slumped to 6.6% in the quarter ended December, a sharp drop from the 7.1% and 8.2% growth recorded in the previous two quarters.
The rate cut gives Prime Minister Narendra Modi a boost in his attempt to win a second term in office when polling begins next week.
“On the eve of the general election, the Reserve Bank of India has delivered another gift to the government,” Shilan Shah, India economist at Capital Economics, said in a note Thursday.
India’s retail price inflation spiked slightly to 2.6% in February after four straight months of decline, the RBI said, but is still well below the central bank’s 4% target. The bank also lowered its inflation forecasts for the next six months.
But core inflation, which excludes food and fuel costs, remains high at 5.4%. Shah said the metric is “a better measure of underlying price pressures” and could come back to bite India’s central bank in the long run.
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The quick-fire rate cuts followed the December appointment as RBI governor of Shaktikanta Das, a former finance ministry bureaucrat. He succeeded Urjit Patel, who quit abruptly after falling out with Modi’s government over the central bank’s autonomy.
“With a growing perception that the RBI’s credibility as an inflation fighter is being eroded under the new governor, further policy loosening raises the risk that inflation rebounds strongly and ultimately requires interest rates to be higher in future,” Shah said.