RBI cuts repo rate by 25 basis points to 7.5%, motivates economic growth

By Accommodation Times News Service

rbi-1The Reserve Bank of India (RBI) lowered its policy repo rate by 25 basis points to 7.5% on Wednesday, this is the second time this year that for easing inflation and for the growth of economy, central bank has initiated this step. Both rate cuts this year were outside of the central bank’s scheduled policy review meetings. The cash reserve ratio was kept unchanged at 4%.

The cut in repo rate is likely to make home loans cheaper.

RBI Governor, Raghuram Rajan said, “Given low capacity utilisation and still-weak indicators of production and credit off-take, it is appropriate for the Reserve Bank to be pre-emptive in its policy action to utilise available space for monetary accommodation.”

The cut comes just days after the government and the RBI agreed to formally adopt inflation targeting, though the central bank introduced its own targets a year ago. As per the analysts said the RBI’s rate cut appeared to give a seal of approval for the government 2015-16 budget, and its pledge to exercise fiscal responsibility, while taking an additional year to meet a fiscal deficit target of 3% of gross domestic product.

“Softer readings on inflation are expected to come in through the first half of 2015-16 before firming up to below 6% in the second half. The fiscal consolidation programme, while delayed, may compensate in quality, especially if state governments are cooperative,” Rajan said.

The statement noted that the rupee’s relative strength also added to disinflationary pressures, although Rajan said the RBI does not target exchange rates and does not have a target for currency reserves.

Inflation has moderated sharply as oil prices slumped since last year. In January, consumer prices rose an annual 5.11%, well within the inflation target agreed by the government and RBI.

In a document dated Feb 20 but published on the ministry website on Monday, both sides agreed to set a consumer inflation target of 4%, with a band of plus or minus 2 percentage points, from the financial year ending in March 2017.

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