MUMBAI: India’s central bank announced on Wednesday a second surprise cut in interest rates in two months as it forecast a further easing of inflation, triggering a surge in share prices.
The Reserve Bank of India (RBI) lowered the benchmark repo rate — the level at which it lends to commercial banks — by 25 basis points to 7.5 per cent with immediate effect.
“Softer readings on inflation are expected to come in through the first half of 2015-16 before firming up to below six percent in the second half,” RBI governor Raghuram Rajan said in a statement.
“Consequently, it has been decided to reduce the policy repo rate under the liquidity adjustment facility (LAF) by 25 basis points from 7.75pc to 7.5pc with immediate effect.”
The announcement caught many observers by surprise as the RBI’s policy-making committee was not due to meet until April 7 and comes after the bank made a similar unscheduled 25-point cut in mid-January. That was the first reduction in 20 months.
Deputy Finance Minister Jayant Sinha praised the RBI for delivering the much needed “short term boost to the economy” and argued that equity markets were moving from hope to conviction based buying.
The Bombay Stock Exchange’s key benchmark index — the Sensex — was up by over 1pc at 29,888.62 points after hitting a record high of 30,024.74 points following the announcement.
The index has gained nearly 22pc since Prime Minister Narendra Modi stormed to power last May promising reforms and growth.
The Indian rupee also gained strength against the US dollar, rising to 61.84 from 61.92 on Tuesday.
Rajan has made controlling inflation a priority since taking the helm of the RBI, often resisting previous calls to reduce interest rates.
WHOLESALE PRICES FALL: But a fall in global oil prices has led to an easing in inflation in recent months, with wholesale inflation (WPI) registering a 0.39pc fall in January, a second drop in three months.
“The RBI rate cut reflects the further significant moderation in inflationary pressures in India,” said Rajiv Biswas, the chief Asia economist for the IHS global financial consultancy.
“With the WPI now showing deflation in wholesale prices and CPI (consumer) inflation pressures having moderated significantly, there is significantly more headroom for the RBI to deliver monetary policy easing.
“With world oil prices set to remain low during 2015, prospects are good for inflationary pressures in India to remain contained during 2015-16.”
The announcement, which comes only days after the new right-wing government unveiled its first full-year budget, was warmly welcomed by its chief economic adviser Arvind Subramanian.
“The rate cut is extremely welcome. It shows that the RBI and the government are on the same page as far as economic outlook,” Subramanian told the CNBC TV18 business channel.
As part of an agreement between the government and RBI, which was signed last month but only made public this week, the central bank has a specific target of bringing inflation consistently below 6pc by January, and to four per cent for the 2016-17 fiscal year.