The Reserve Bank of India cut its repo interest rate by 25 basis points to 7.75 per cent in a surprise move on Thursday, making its first reduction since May 2013, as inflation showed signs of slowing and the government was making efforts to contain the fiscal deficit.
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- Cheering the move, stock markets zoomed, with the Sensex surging over 800 points to hit 28,194 at day's high. The Sensex ended 728 points higher to 28,075, its biggest gain in absolute terms in over five years. The Nifty closed at 8,494, up 216 points. The rupee soared by 69 paise to hit 61.49 against the dollar at day's high. The rupee closed higher at 62.05/dollar against 62.18 on Wednesday. (Read)
- The move will bring relief to borrowers and industry, boosting consumer demand. With the RBI reducing the benchmark repo rate, the level at which it lends to commercial banks, home and auto loans are expected to get cheaper. United Bank of India has already announced a reduction in base rate by 0.25 per cent from February 1. (Read)
- Other banks are expected to cut their lending rates by 0.10 per cent to 0.25 per cent.
- Finance Minister Arun Jaitley hailed the decision of RBI to cut the interest rate, saying it is positive for the Indian economy and will certainly help in reviving the investment cycle the government is trying to restore. Deputy Finance Minister Jayant Sinha said rate cut would mark an "inflection point" after a period of high interest rates. Mr Sinha said the RBI decision was driven by declines in both actual and expected inflation, and not by any concerns that India's economic recovery was losing traction. "The economy is picking up momentum," he added.
- The RBI had been under pressure from the government and business leaders to reduce rates to increase lending and help kick-start the economy, but RBI governor Raghuram Rajan insisted that his priority was bringing inflation under control. (Read: India Inc Hails RBI Rate Cut)
- In a statement today, the RBI cited lower-than-expected inflation, weak crude prices and weak demand as the reasons for its move, as well as the government's commitment to sticking to a fiscal deficit target. "These developments have provided headroom for a shift in the monetary policy stance," it said.
- The Central Bank added that it could cut interest rates further should inflation continue to ease, while it would also monitor the government's progress on fiscal consolidation.
- Helped by global oil prices plunging 60 per cent since June, India's wholesale price index for December rose just 0.11 per cent year-on-year, after staying flat in November, according to data released on Wednesday.(Read)
- The move, ahead of a RBI policy meeting on February 3 and the government's annual Budget at the end of February caught markets off guard.
- Analysts expect the RBI to keep its lending rates steady at its next month policy review. Sajjid Chinoy, India economist at JP Morgan, said Dr Rajan is likely to wait for the government's budget before taking further monetary easing measures.