tIndia’s central bank cut its main interest rates by 50 basis points yesterday — its first reduction in three years — but said there was limited scope for further easing.
The Reserve Bank of India (RBI) said the benchmark repo rate, at which it lends to commercial banks, would fall to 8 percent and the reverse repo rate, which it pays banks for deposits, would fall to 7 percent.
“The reduction in the repo rate is based on an assessment of growth having slowed below its post-crisis trend rate,” RBI Governor Duvvuri Subbarao said.
The central bank had hiked interest rates 13 times from March 2010, undertaking the most aggressive monetary policy tightening drive of all major economies. Rates have been on hold since December last year.
The stock markets cheered the rate cut, with the benchmark 30-share SENSEX comprising blue-chip stocks up 0.72 percent at 17,274.54 points.
The index then retraced marginally to 17,231.88, but was still up 0.55 percent at midday.
The bank’s decision comes as India’s inflation climbed unexpectedly last month, data showed on Monday, fueled by rises in food and fuel prices.
Business leaders had been clamoring for interest rates to be reduced to boost the economy, expected by the government to grow 6.9 percent in the financial year just ended, its slowest pace since the 2008 financial crisis.
Industry heads welcomed the sharper-than-expected cut.
“The repo rate cut will provide the boost to investment as well as send a strong signal that turning around growth is of pivotal importance,” said Chandrajit Banerjee, director-general of the Confederation of Indian Industry.
Rupa Rege Nitsure, chief economist with the state-run Bank of Baroda, said the “prudent policy” would create pressure for the banks to lower their rates.
“This is like a hormone injection to improve the feel-good factor,” she said.
Emerging-market nations have been cutting rates to bolster expansion and shield their economies from Europe’s sovereign debt crisis as well as the weakened US economy and to offset a slowdown in China.
In a preliminary step to loosen monetary policy, the RBI has twice reduced since the start of this year the amount of cash commercial banks must keep in reserve in a bid to boost lending and spur growth.
Subbarao forecast India’s GDP growth in the new financial year, which started on April 1, at 7.3 percent, slightly below the government’s estimate of 7.6 percent.
This is still far below the 8 to 9 percent growth for much of the past decade.
Subbarao said that inflation, though on a downtrend, remains “challenging.”
India’s government is expected to raise fuel prices once again in coming months, which could raise inflationary pressures.