RBI surprises with rate cut, trims repo by 25 bps

The Reserve Bank of India (RBI) cut its policy repo rate by 25 basis points to 7.5% on Wednesday, delivering its second cut this year on the back of easing inflation and the government’s commitment to fiscal discipline.

The RBI had lowered interest rates by 25 bps on Jan 15. Both rate cuts this year were outside of the central bank’s scheduled policy review meetings.

The cash reserve ratio was kept unchanged at 4%.

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The central bank said the need to act outside the policy review cycle is prompted by two factors.

“First, while the next bi-monthly policy statement will be issued on April 7, 2015, the still weak state of certain sectors of the economy as well as the global trend towards easing suggests that any policy action should be anticipatory once sufficient data support the policy stance.

“Second, with the release of the agreement on the monetary policy framework, it is appropriate for the Reserve Bank to offer guidance on how it will implement the mandate,” the central bank said.

The RBI said the CPI inflation at 5.1% in January was well within its target of 8%, adding that disinflation was evolving at a faster pace than envisaged.

Further monetary actions will be conditioned by incoming data, especially on the easing of supply constraints, improved availability of key inputs such as power, land, minerals and infrastructure, continuing progress on fiscal consolidation, the pass through of past rate cuts into lending rates, the monsoon outturn and developments in the international environment, it said.