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India stocks, bonds retreat as central bank adopts less aggressive rate cut

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India stocks, bonds retreat as central bank adopts less aggressive rate cut

India's central bank cut its rates by 25 basis points, marking the fifth cut this year, to the lowest level in more than nine years, a move that did not seem as aggressive as some markets participants had predicted.

The Reserve Bank of India cut its benchmark interest rate to 5.15% from 5.40%, saying inflation was due to remain below the target in the remaining period of 2019-20 and the first quarter of 2020-21.

The reverse repo rate under the liquidity adjustment facility now stands at 4.90% and the marginal standing facility and the bank rate stand at 5.40%.

Consumer price index inflation between July and August came in at 3.1%. The central bank raised its inflation forecast to 3.4% for the second quarter of fiscal 2019-2020, while maintaining an estimated range of 3.5%-3.7% for the second half of the fiscal year.

The central bank's medium-term inflation target is 4%, plus or minus 2%.

The Reserve Bank of India cut its GDP growth projection for the fiscal year to 6.1% from 6.9% previously estimated amid weak domestic demand conditions and global trade and growth worries.

The central bank said it was sticking to an accommodative stance, adding that there was "policy space" to address growth concerns.

India's economic growth fell to a six-year low in the first quarter of fiscal year 2019-2020, to an annual growth rate of 5.0%, lower than 5.8% in the previous quarter and 8.0% in the year-earlier period. Growth in the manufacturing sector weakened and sharply slowed in the construction and agriculture, forestry and fishing sectors.

Central banks around the world eased their monetary policies as the U.S. Federal Reserve cut its benchmark rate for the second time this year in September to stave off worries about a potential slowdown.

The S&P Bombay Stock Exchange Sensex index closed 1.1% down and bonds retreated as of 2:25 p.m. in India.

Markets reacted negatively to the lack of a "more aggressive cut," according to Mitul Kotecha, senior emerging markets strategist at TD Securities.

The Indian rupee, which was down earlier in the day, edged up 0.08% around 4:40 p.m. local time.

Nordea Markets wrote there were some expectations for a bigger rate cut.

Analysts believe there is more central bank easing lined up.

Capital Economics Senior India Economist Shilan Shah expects the central bank to deliver another 25-basis-point-rate cut at its December meeting while Kotecha expects the next cut in the first quarter of 2020.

However, Shah expects "modest rate hikes" by the end of 2020, compared to market expectations of rates staying unchanged for two years after the expected near-term loosening.

The Indian government recently introduced several measures in the wake of the growth slowdown, including slashing corporate rates and rolling out a program to boost exports.

"While the recent measures announced by the government are likely to help strengthen private consumption and spur private investment activity, the continuing slowdown warrants intensified efforts to restore the growth momentum," the RBI said.