India delivers unconventional rate cut to spur economy

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India’s central bank lowered its benchmark interest rate by an unconventional 35 basis points, its fourth reduction this year to support a slowing economy.

The repurchase rate was reduced to 5.4%, the lowest since 2010, surprising most of the 40 economists surveyed by Bloomberg who had predicted a quarter-point cut. Aastha Gudwani, an economist at Bank of America Merrill Lynch in Mumbai, was the only analyst to correctly predict the move.

Governor Shaktikanta Das, who had previously flagged the possibility of a 35 basis-point cut, told reporters on Wednesday the Monetary Policy Committee viewed a quarter-point move as “inadequate.” A half-point reduction would have been “excessive” and 35 basis-point of easing was deemed “balanced,” he said.

The Reserve Bank of India has been the most aggressive in Asia in cutting interest rates this year to boost growth from a five-year low and spur investments. The Federal Reserve’s rate cut last week and escalating U.S.-China trade tensions have given policy makers reason to provide more support to their economies.

New Zealand also surprised with a bigger-than-expected easing earlier on Wednesday, while the Bank of Thailand followed with an unexpected cut to its key rate for the first time in four years.

Four of the six MPC members voted for a 35 basis-point cut, the RBI said. The monetary policy stance was left at accommodative.

Finance Minister Nirmala Sitharaman, who kept government spending in check in her maiden budget last month, had called for “significant” policy easing from the central bank to help revive growth.

The central bank cut the economy’s growth outlook again, expecting gross domestic product expansion for the year that began April 1 to ease to 6.9% from 7% forecast in June. It estimated inflation will remain benign at 3.1% in the fiscal second quarter, staying well under the central bank’s 4% medium-term target for the rest of the year.

India’s slowdown is cyclical and needs adequate measures by all stakeholders to address the problem, the RBI governor said, while asking reporters not to read too much into the size of Wednesday’s move.

“There’s nothing sacred about multiples of 25,” Das said, referring to the conventional quarter-point moves. “It is a judgment call that the MPC has taken.”

The bigger-than-estimated cut meant the shorter-end bonds rallied, while the benchmark 10-year traded lower.

The decision “shows the central bank’s intention to do much more than 25 basis points,” said Rao, who is expecting the RBI to cut again in October. Lowering of inflation forecast also means policy will be supportive of growth, she said.

Latest high-frequency indicators from auto sales to exports show demand at home and abroad is waning. A lingering crisis among shadow banks has curbed borrowings by consumers and companies, and an uncertain monsoon is casting a shadow on rural consumption and wages. The next pulse-check for the economy is due on Aug. 30, when gross domestic product data is due.

Das said in a recent interview that policy action will be depend on incoming economic data, while suggesting the MPC’s change to an “accommodative” stance in June was equivalent to a quarter-point cut.