India central bank cuts rates ahead of election

India central bank cuts rates ahead of election

With Britain due to leave the European Union in just 50 days, the central bank said that questions over Brexit are weighing so much on the economy that there's a one-in-four chance it could slip into recession this year - even if a Brexit deal is reached.

The Bank downgraded its forecast from the 1.7 per cent predicted in November, and also cut its outlook for 2020 to 1.5 per cent. "With downside risks to growth, and inflation well within the comfort zone of the RBI, and real interest rates high, a rate cut was expected", said Upasna Bhardwaj, senior economist at Kotak Mahindra Bank.

India's rate cut continues a trend in which some major central banks, anxious about slowing global growth and helped by low inflation, have moved firmly away from the tightening moves made previous year. The "fog of Brexit" is also creating tensions, Carney said.

In a sharp reversal from October, when the Reserve Bank of India took rate cuts off the table, governor Shaktikanta Das - who took office in December - opened the door to more policy easing and brought growth firmly back onto the Monetary Policy Committee's agenda.

The BoE has previously said a worst-case Brexit scenario, with no deal for a transition period and a sudden loss of confidence in Britain among foreign investors, could hammer the economy more than the global financial crisis did.

With Brexit uncertainty wreaking havoc on the economy, that will be the lowest annual rate of growth since 2009.

The pound initially tumbled after the report, but later recovered to stand 0.4% higher at 1.298 United States dollars and 0.4% up at 1.14 euros.

And banks are reluctant to cut deposit rates in the fiscal year's last quarter, as they are keen to shore up their books while not losing hefty deposits.

The BoE saw a fall this year in business investment and housebuilding, which have been weak in the run-up to Brexit, as well as a halving of the growth rate in exports, reflecting the global slowdown. The economy could grow by around 0.5 percentage point more over the coming three years.

Although it did hold out the hope of a recovery later this year if an orderly deal is negotiated by the March deadline.

The FXStreet Forecast Poll 1-month forecast turned neutral expecting probability of delayed Brexit may change the outlook going forward.

The Bank said on the flip side, growth could slump to a potential 0.8 per cent in 2019 should uncertainty persist and financial conditions tighten.

Carney denied the February inflation report was a move away from its plan for "gradual and limited" interest rate hikes in the future.

"These decisions are in consonance with the objective of achieving the medium-term target for consumer price index (CPI) inflation of 4 per cent within a band of plus/minus 2 per cent, while supporting growth", RBI said.

"Given core-inflation is already quite high, we see headline inflation rising sharply towards the end of the year".

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