Fitch Ratings in its latest report has stated the Reserve Bank of India (RBI) is the first central bank in the Asia-Pacific region to start an explicit interest rate easing cycle buoyed by benign food inflation and easier global financial conditions following the US Fed's shift to a more dovish policy stance. The six-member Monetary Policy Committee (MPC), headed by RBI Governor Shaktikanta Das, cut rates in February and April citing prospects of benign inflation. In the four months of 2019, the RBI has cut policy interest rates twice by 0.25 percent each to one-year low of 6 percent. It was the first back-to-back rate cut by the central bank since the MPC was formed in late 2016.
According to the report, consumer price inflation at 2.9 percent has remained below the RBI's comfort zone of 4 percent (+/- 2 percent). It said ‘Fitch's baseline is for the RBI to remain on hold for the remainder of 2019, although we acknowledge the central bank may look for opportunities for further easing’. Adding further, it noted that modest fiscal slippage relative to the central government's own targets in recent years has resulted in a stalling of fiscal consolidation. It added that campaign promises to support farmers' incomes, including direct cash transfers and farm loan waivers will, moreover, add to spending pressures in current fiscal.
The rating agency has stated that significant and politically difficult fiscal deficit reduction would be key to meet the general government debt ceiling of 60 percent of GDP by FY25 from a Fitch-estimated 68.8 percent of GDP in FY19. It pointed out that India's ratings balance a strong medium-term growth outlook and relative external resilience with strong foreign reserve buffers, against high public debt, financial sector fragilities and some lagging structural factors.