RBI stuns market with 25 bps rate cut ahead of Feb policy

Moneycontrol Bureau

The Reserve Bank of India Thursday surprised everybody by cutting repo rate by 25 basis points to 7.75 percent from 8 percent, ahead of its February 3 policy review. Repo is the rate at which RBI lends short term funds to banks.

“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,” the RBI said in a release on its decision to cut the benchmark rate.

Bankers and economists said the move would send out a positive signal that RBI was now focused on growth, and that inflation was finally under control.

Sources in the Finance Ministry said it expected banks to pass on the rate cut to consumers through a 50 basis point-reduction in lending rates.

The RBI said 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 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.