Rajan cuts India interest rates in unscheduled move after Modi budget

India’s central bank lowered interest rates in an unscheduled move for the second time this year, citing weakness in Asia’s third-largest economy.

Governor Raghuram Rajan cut the benchmark repurchase rate to 7.5 per cent from 7.75 per cent, the Reserve Bank of India said in a statement on Wednesday. The decision came four days after prime minister Narendra Modi’s government shifted funding to infrastructure in its first full-year budget and agreed to a formal inflation target.

“This makes explicit what was implicit before – that the government and the Reserve Bank have common objectives and that fiscal and monetary policy will work in a complementary way,” Mr Rajan said in the statement, referring to the monetary policy framework agreement.

“In sum, then, the government intends to compensate for the delay in fiscal consolidation with a commitment to an improvement in the quality of adjustment.”

India’s move underscores a strengthening cycle of global monetary easing outside the US, with Europe tomorrow forecast to unveil more about its quantitative-easing plans. More than a dozen central banks from Turkey to China have eased policy in 2015 as a slide in oil prices damps inflation.

Indian stocks climbed to a record, with the benchmark S&P BSE Sensex rising 0.9 per cent as of 10am in Mumbai. The rupee strengthened 0.1 per cent.

Twelve of 15 economists surveyed by Bloomberg News after the February 28 budget predicted Rajan would reduce the repurchase rate only at the next scheduled review on April 7. Three saw the possibility of a cut this month even after Modi opted for a fiscal deficit target of 3.9 per cent of gross domestic product, wider than the 3.6 per cent he initially targeted.

“I’m quite surprised by the fact they cut rates right after the budget – I thought the wider budget deficit would discourage them,” said Dariusz Kowalczyk, an economist with Credit Agricole CIB in Hong Kong. “This is a very welcome move from the perspective of the government and from the perspective of achieving strong growth this year.”

Interest-rate swaps show that investors are betting that India will cut interest rates by another 50 basis points by the end of 2015, the steepest decrease after Turkey among 14 emerging markets tracked by HSBC.


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