India cuts interest rates just months before Modi's big election test

The Reserve Bank of India (RBI) reduced the key rate at which it lends to banks from 6.5% to 6.25% on Thursday, surprising most economists polled by Reuters and Bloomberg who had predicted rates would remain unchanged.

The RBI, now led by former finance ministry official Shaktikanta Das, cited a drop in inflation, lower oil prices and a global economic slowdown as factors behind its decision. Retail inflation in India fell to 2.2% between October and December, its lowest level in 18 months, while core inflation dipped to 5.6%.

The decision to cut rates is good news for Indian Prime Minister Narendra Modi, who is seeking a second term in office when India goes to the polls in the coming months. India's growth slowed to 7.1% in the quarter ending September, and Modi's record on economic reform and job creation has come under increased scrutiny.

The rate cut could fuel concerns over the autonomy of the country's central bank.

Modi's appointment of Das in December came barely 24 hours after the sudden resignation of his predecessor Urjit Patel, who left following a rift between the central bank and the government. Indian media reported that the government was leaning on Patel to do more to boost the economy before the election.

Modi's appointment of Das, a former government official, to head India's central bank has been controversial.

Patel's predecessor, Raghuram Rajan, also quit prematurely in 2016 over disagreements with Modi's government.

On Thursday, the central bank shifted its broader monetary policy stance from "calibrated tightening" to "neutral."

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"Shaktikanta Das has delivered what the Modi government was hoping for," Mark Williams, chief Asia economist at Capital Economics, said in a note.

"A rate cut today will do little to boost the economy before the election," Williams added. "But it might be expected to give a lift to financial markets and investor sentiment."

India's benchmark stock indexes were flat on Thursday following the announcement, while its currency, the rupee, edged higher as well. Since plunging to record lows of nearly 75 rupees against the US dollar last year, the currency has bounced back to trade around 71.

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