Indian central bank cuts key interest rate

MUMBAI - Agence France-Presse

An officer stands guard in front of the Reserve Bank of India (RBI) in Mumbai. REUTERS photo

India’s central bank cut its main interest rates by 50 basis points yesterday --its first reduction in three years-- but said there was limited scope for further easing in policy.

The Reserve Bank of India (RBI) said the benchmark repo rate, at which it lends to commercial banks, would fall to 8 percent and the reverse repo rate, which it pays banks for deposits, would fall to 7.0 percent.

“The reduction in the repo rate is based on an assessment of growth having slowed below its post-crisis trend rate,” the RBI governor Duvvuri Subbarao said.

The central bank had hiked interest rates 13 times from March 2010, undertaking the most aggressive monetary policy tightening drive of all major economies. Rates have been on hold since December last year.

The stock markets cheered the rate cut, with the benchmark 30-share Sensex index comprising blue-chips up 0.72 percent at 17,274.54 points.

The index then retraced marginally to 17,231.88, but was still up 0.55 percent at midday.
The bank’s decision comes as India’s inflation climbed unexpectedly in March, data showed on April 16, fuelled by rises in food and fuel prices.

Business leaders had been clamouring for interest rates to be reduced to boost the economy, expected by the government to grow 6.9 percent in the financial year just ended, its slowest pace since the 2008 financial crisis.

Industry heads welcomed the sharper-than-expected cut.

“The repo rate cut will provide the boost to investment as well as send a strong signal that turning around growth is of pivotal importance,” said Chandrajit Banerjee, director general, Confederation of Indian Industry.

Rupa Rege Nitsure, chief economist with the state-run Bank of Baroda, said the “prudent policy” would create pressure for the banks to lower their rates.

“This is like a hormone injection to improve the feel-good factor,” she told Agence France-Presse.