Subdued inflation and demand prompted India's central bank, RBI, on Wednesday to reduce its key lending rate by 25 basis points (bps)
Reserve Bank of India
The Reserve Bank of India cut its main policy rate on Wednesday by a quarter percentage point to a more than 6-1/2 year low, saying a slump in inflation opened room for monetary easing, and that it would monitor economic data to determine further action.
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The rate cut is the RBI's first easing move since one of the same size in October and the first by a central bank in Asia since December.
Forty of 56 economists polled by Reuters had predicted the RBI would cut its repo rate by 25 basis points to 6.00 percent - the lowest since November 2010 - as a slump in food prices sent June consumer inflation to a more than five-year low of 1.54 percent.
That's well below the RBI's 4 percent target and its projection of 2.0-3.5 per cent in April-September, putting pressure on the central bank from the government and others to cut rates aggressively.
The RBI said in a statement it would retain its "neutral" stance, warning it expected inflation to rise but pinning further moves on the economic data. The comments sent the most liquid 10-year bond yield fell 2 basis points to 6.45 percent from levels before the decision, while the rupee strengthened to 63.78 per dollar from 63.81. The broader NSE share index was down 0.3 percent.
Wednesday's statement could continue to leave the RBI facing pressure from a government keen to lift the economic growth from January-March's 6.1 percent - fast by global standards but India's lowest in over two years.
The RBI stuck to its inflation projections, including that inflation could accelerate to 3.5 percent to 4.5 percent in October-December due to factors such as planned pay hikes for government employees.
The monetary policy committee "remains focused on its commitment to keeping headline inflation close to 4 per cent on a durable basis," it said. Four members of the committee voted to cut rates by 25 bps, while one voted for a 50 bps cut and one voted for leaving rates unchanged.
The RBI also cut the reverse repo rate by 25 bps to 5.75 percent.
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