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India central bank cuts key rate to 9-year low amid slowing economic growth

The Reserve Bank of India cut its key interest rate by more than expected to a nine-year low amid weak economic activity, with elevated trade tensions posing downside risks.

The monetary policy committee cut the policy repo rate under the liquidity adjustment facility by 35 basis points to 5.40%, marking the fourth rate cut this year. The consensus estimate of economists polled by Econoday was for a 25-basis-point rate cut.

The committee also determined to maintain an accommodative policy stance, which suggests further loosening will follow in the near term, Shilan Shah, senior India economist at Capital Economics, wrote.

"But we maintain our view that aggressive loosening will be a mistake," Shah said, adding that further easing raises the risk of inflation rebounding, ultimately requiring rate hike over the long term.

The reverse repo rate under the liquidity adjustment facility now stands at 5.15%, while the marginal standing facility rate and the bank rate at 5.65%.

The decision comes at a time when central banks around the world are injecting additional monetary stimulus as global trade fears continue to grow, weighing on global growth. Earlier today, the New Zealand central bank surprised markets with a larger-than-expected rate cut, and analysts believe that another rate cut could be in store for early next year amid growing trade tensions.

Recently, a number of central banks in the Middle East and Hong Kong's monetary authority slashed their interest rates after the U.S. Federal Reserve's widely expected decision to ease its own policy.

The Reserve Bank of India revised its expectations for CPI inflation to 3.5%-3.7% in the second half of fiscal 2019-2020, compared to a prior 3.4% to 3.7% range. CPI inflation in India, excluding food and fuel, stood at 4.1% in May and June, down from 4.6% in April.

The central bank's medium-term inflation target is 4%, plus or minus 2%, and CPI inflation is expected to be 3.1% in the second quarter of fiscal 2019-2020.

The central bank further reduced its real GDP growth projection to 6.9% for fiscal 2019-2020 from 7.0% estimated previously, with risks tilted to the downside.