RBI lowers repo rate by 25bp on external concerns, unlikely to lower further in 2016

The Reserve Bank of India lowered its repo rate by 25bp to 6.5%, on par with market expectations. However, the central bank surprisingly raised the reverse repo rate by 25bp to 6%, which narrows the policy rate corridor to 50bp from 100bp. The RBO maintained a dovish tone and promised to ease policy again if monsoon rains permit.

RBI lowered its rates today to be ahead of the curve that is mainly driven by external concerns, according to Nordea Bank. The central bank was wary in its assessment of the global economy and has underscored the major challenges faced by economies of emerging markets and China. Furthermore, it is clear that the RBI does not want to stand out as most major central banks are acting dovish, added Nordea Bank. Several central banks in Asia have eased policy or are on the verge of easing.

RBI’s move today was due to external factors, which might depreciate the nation’s industrial activities; outlook, noted Nordea Bank. Domestic conditions of India have not worsened. The country’s economy is likely to continue expanding around 7.5%, while inflation has been accelerating as poor monsoon rains have impacted agricultural production.

Since January 2015, the RBI has lowered rates five times and therefore has limited scope to further lower rates. Hence the central bank is unlikely to further lower rates in 2016, according to Nordea Bank.