The Reserve Bank of India cut its key interest rate yesterday by a quarter percentage point in a surprise move that adds impetus to government efforts to revive Asia’s third-biggest economy.
The decision to lower the rate to 7.75 percent, announced more than two weeks before the central bank’s planned monetary policy review on Feb. 3, follows several months of declines in India’s stubbornly high inflation.
India’s short-term lending rate has been held at 8 percent since January last year to counter inflation, which hit double digits last year.
Photo: Bloomberg
However, helped by lower oil prices, “both near-term and longer-term inflation expectations have eased to single digits for the first time since September 2009,” the bank said in a statement. Last month, inflation was 5 percent.
The rate cut adds to optimism that India is recovering from the economic malaise that helped catapult Prime Minister Narendra Modi into office in May last year. A UN report on Wednesday predicted the country’s economy would grow by 6.4 percent during this fiscal year, up from 4.7 percent in the fiscal year ended March last year.
The Indian Ministry of Finance has predicted growth in the current fiscal year of about 5.5 percent.
The central bank also noted “the government has reiterated its commitment to adhering to its fiscal deficit target” of 4.1 percent of GDP this year, as it prepares next year’s budget for presentation next month.
The news boosted India’s currency and stock market. The SENSEX was up 2.1 percent and the US dollar fell to 61.76 rupees from 62.16 rupees on Wednesday.
Indian Minister of Finance Arun Jaitley, who was pressing the bank to lower interest rates, said the move would “lead to more money in the hands of the consumer for greater spending.”
He said it “will certainly help in reviving the investment cycle the government is trying to restore.”
The bank said that as it considers further rate cuts it will want to be sure that inflation continues to decline and that supply bottlenecks in the electricity, mining and infrastructure industries are cleared up.
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