India’s central bank on Tuesday cut its key interest rate by 50 basis points, bringing it down to 6.75 percent -- its lowest level in four years. The cut in the repo rate -- the rate at which banks borrow from the central bank -- was much sharper than analysts had expected, most of whom predicted a 25-basis point cut.
This is the fourth interest rate cut by the bank this year, which took similar decisions in January, March and June. In a statement, Reserve Bank of India Governor Raghuram Rajan said that the decision was taken to support the domestic economy amid record falling consumer inflation and increased volatility in global markets. At the same time, Rajan voiced concerns about the fragility of the global and Indian economies.
“The September 17 decision of the Federal Open Market Committee to stay on hold in response to global conditions and weak domestic inflation lifted financial markets briefly, but overall financial conditions are yet to stabilize,” Rajan said, in the statement. “In India, a tentative economic recovery is underway, but is still far from robust.”
India’s economy expanded at a slower-than-expected annualized rate of 7 percent in the April-to-June quarter. While this is a faster rate than China's, it remains well below the government’s target of 8 to 8.5 percent growth for the year ending in March. The central bank has, therefore, come under increasing pressure from Prime Minister Narendra Modi's government to boost growth after inflation hit a record low of 3.6 percent in August, primarily as a result of falling commodity prices.
“Investment is likely to respond more strongly if there is more certainty about the extent of monetary stimulus in the pipeline, even if transmission is slow,” Rajan said, in the statement, adding that the bank will “continue to remain vigilant” for signs that monetary policy adjustments are needed to keep the economy on a disinflationary path.
Rajan is looking to keep inflation within 6 percent by January, 5 percent a year later and near 4 percent by early 2018.
Following the announcement, India’s benchmark S&P BSE Sensex, which fell more than 300 points during early trade, wiped most of its losses and was trading about 55 points down. The larger Nifty index also recovered and was trading down 0.3 percent.