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Rajan surprises with 25 bps rate cut
Reserve Bank Governor Raghuram Rajan surprised everyone on Wednesday by reducing short-term lending rates by 0.25 per cent or 25 basis points to 7.5 per cent – a move that sent stock markets on a roller-coaster ride before they ended the day in red.
Slashes repo rate by 0.25% to 7.5%; Investors mop up profits, leaving stock indices in red
Mumbai: Reserve Bank Governor Raghuram Rajan surprised everyone on Wednesday by reducing short-term lending rates by 0.25 per cent or 25 basis points to 7.5 per cent – a move that sent stock markets on a roller-coaster ride before they ended the day in red. The short term lending rate (repo) will be reduced from 7.75 per cent to 7.5 per cent with immediate effect and the other rates would be adjusted accordingly, the RBI chief said in a statement an hour before stock markets were to open for the day. He attributed the move to softening inflation and the government's commitment to continue the fiscal consolidation programme.
This move comes close on the heels of Finance Minister Arun Jaitley presenting the first full-time Budget of the Modi government, which was considered by many as pro-corporate exercise. Also, this is the second time in two months that the RBI has cut interest rates outside the regular policy reviews.
Last time on January 15, it had cut the repo rate by 0.25 per cent to 7.75 per cent.
“Softer readings on inflation are expected to come in through the first half of 2015-16 before firming up to below 6 per cent in the second half. The fiscal consolidation programme, while delayed, may compensate in quality, especially if state governments are cooperative,” Rajan explained.
He further said: “Given low capacity utilisation and still-weak indicators of production and credit off-take, it is appropriate for the Reserve Bank to be pre-emptive in its policy action to utilise available space for monetary accommodation". The RBI said growth is showing signs of pick-up and retail inflation at 5.1 per cent in January is well below the target.
Rajan said the need to act outside the policy review cycle was prompted by two factors - the data supports the policy stance as well as for providing RBI's guidance for inflation targeting. The rate cut is also expected to lower the cost of capital for the companies and give a fillip to the investment climate. It may also bring down EMIs for home, auto and other loans and give a boost to the economy.
Govt applauds
Welcoming RBI's decision, Minister of State for Finance Jayant Sinha said it should bring down the loan EMIs significantly and there is room for further easing of rates.
“What is going to happen to rate cycle moving forward is going to be driven by data and RBI has signalled this clearly,” he said. Sinha said that the rate cut was a vote of confidence for the Union Budget presented last week.
“We have said in Parliament that we are pursuing a very prudent fiscal consolidation road map. Our aim is to move growth onto a sustainable, non-inflationary path. RBI has appreciated budget's 'fine balance'. It is a welcome step for all citizens of India as everyone is looking for near-term boost in economy,” he added.
