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RBI cuts repo rate by 25 basis points ahead of Feb 3 policy

The path of inflation, while below the expected trajectory, has been consistent with the assessment of the balance of risks in the Reserve Bank’s bi-monthly monetary policy statements, the RBI release said.

The News International Team

The Reserve Bank of India Thursday surprised the market by cutting repo rate by 25 basis points to 7.75 percent from 8 percent, with immediate effect, ahead of its policy review on February 3.

“Households’ inflation expectations have adapted, and both near-term and longer-term inflation expectations have eased to single digits for the first time since September 2009. Inflation outcomes have fallen significantly below the 8 per cent targeted by January 2015. On current policy settings, inflation is likely to be below 6 per cent by January 2016,” the RBI said in arelease on its decision to cut the benchmark rate.

“The path of inflation, while below the expected trajectory, has been consistent with the assessment of the balance of risks in the Reserve Bank’s bi-monthly monetary policy statements,” the release said.

Demands for a rate cut had been mounting following the steady decline in inflation. However, market was divided on whether the RBI would cut rate at its monetary policy review in February. That is because Governor Raghuram Rajan had indicated that he would watch for signs of a sustainable decline in inflation before deciding on a rate cut.

“Crude prices, barring geo-political shocks, are expected to remain low over the year. Weak demand conditions have also moderated inflation excluding food and fuel, especially in the reading for December. Finally, the government has reiterated its commitment to adhering to its fiscal deficit target,” the RBI release said.

It is still not clear if this rate cut marks the beginning of a downcycle in interest rates.

The RBI has said the key to further easing will be data confirming a further decline in inflation.

“Also critical would be sustained high quality fiscal consolidation as well as steps to overcome supply constraints and assure availability of key inputs such as power, land, minerals and infrastructure,” the RBI release said.

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