India's surprise half-point rate cut

India might be the world's fastest-growing major economy, but the pace wasn't enough for Sanjay Malhotra, the recently installed governor of the Reserve Bank of India. He unexpectedly cut the central bank's key rate by 50 basis points a week ago and slashed the cash reserve ratio for lenders.

Malhotra said growth is "lower than our aspirations" and the RBI felt it was "imperative to stimulate domestic consumption and investment" amid rising global uncertainties.

A pronounced disinflationary trend has given the RBI chief room to maneuver. The nation's grain stores are full after a better-than-expected monsoon season. Weaker prices for imported commodities like oil also helps.

The rupee is another factor. We've previously discussed the currency's increased volatility since a de facto peg to the dollar was scrapped late last year, when Malhotra took office. After a period of depreciation, the rupee is appreciating again -- making imports less expensive.

Households are expecting the slowest price increases in five years; professional economists are expecting even more disinflation.

Meanwhile, the surprise change to the cash reserve ratio — the amount banks need to hold with the RBI — is expected to release INR 2.5 trillion (USD 29.1 billion) of liquidity into the financial system. The ratio will be cut by 100 basis points to 3% in a staggered manner for the rest of the year; like the policy rate cut, it's the biggest reduction since the pandemic turned into a global crisis in March 2020.