The Reserve Bank of India cut rates to their lowest level since early 2011.
Governor Raghuram Rajan lowered the key interest rate by 25 basis points to 6.50%, as was expected by most economists, according to a statement from the bank on Tuesday.
This was the first cut in six months, but the fifth since the beginning of 2015.
In a statement that accompanied the decision, the Rajan-led
bank suggested that “monetary policy will remain accommodative.”
“The Reserve Bank will continue to watch macroeconomic and financial developments in the months ahead with a view to responding with further policy action as space opens up,” it added.
The RBI also noted that it expected CPI inflation to moderate to 5% by March 2017.
However, it cited risks to inflation such as oil prices, the civil servant pay hike, and adverse weather conditions.
Ultimately, according to a team of Morgan Stanley analysts, the big takeaway here is that India’s next move will likely be dependent on what happens with inflation.
The “magnitude of easing [will] be dependent on [the] inflation outcome,” a Morgan Stanley team led by Upasana Chachra wrote in a note to clients after the announcement.
“We maintain our view that inflation will be sustainably lower at 4.75% YoY in QE Mar-17. Based on our inflation forecast and the RBI’s stated real rates target of 1.5-2.0%, we see the possibility for rate cuts of another 25 basis points in 2016,” they wrote.
“However, if normal weather conditions in the critical monsoon rainfall season (Jun-Sep period) bring food inflation lower, it would open up room for additional easing,” they added.
The Indian rupee is weaker by 0.7% to 66.558 against the dollar as of 12:36 p.m. ET.