With India’s inflation in a comfortable zone and the fiscal math under control, Reserve Bank of India (RBI) governor Raghuram Rajan finally cut key interest rates on Tuesday (April 5).
In his first monetary policy review in the new financial year, Rajan cut the repo rate (pdf)—the rate at which the central bank lends to commercial banks—by 25 basis points to 6.5%.
The repo rate is now at the lowest in over five years.
A decrease in repo rate means the cost of funding for banks will ease, in turn boosting liquidity in the market. Rajan also increased the reverse repo rate—the rate at which the banks lend to the central bank—by 25 basis points to 6%.
In a press briefing in Mumbai, Rajan said that this was done to help banks transmit the benefit of the rate cut to the final consumers and to increase the availability of cash in the system. The central bank has cut interest rates by 150 basis points since the monetary easing cycle began.
Most analysts and experts were expecting a rate cut since finance minister Arun Jaitley presented the budget on Feb. 29.
“It (rate cut) is sensible given the uncertainty in the economy,” Rajan said. “Borrowing rates are coming down significantly in the economy and we will see more transmission in the next few months too,” he added.
The central bank’s policy statement although indicated that it will continue to monitor inflation and monsoon to decide the future trajectory of interest rates.
India’s retail inflation cooled down to 5.18% in February, well under the RBI’s target. Fiscal deficit is now at 3.69% of the GDP and the government intends to bring this down to 3.5% in the 2017 fiscal, indicating that the gap between the government’s expenses and revenue is narrowing.