RBI cuts lending rate by 0.25% to 7.5% on softening inflation

New Delhi: Within days of presentation of the Budget, the Reserve Bank today surprised markets by reducing the benchmark interest rate by 0.25 per cent to 7.5 per cent on the back of softening inflation and the government’s commitment to continue the fiscal consolidation programme.

The short term lending rate (repo) will be reduced from 7.75 per cent to 7.5 per cent with immediate effect and the other rates would be adjusted accordingly, RBI Governor Raghuram Rajan announced in an early morning press release.

Soon after the rate cut announcement, the BSE Sensex soared to the historic 30,000-mark in opening trade.

This is the second time in two months that the RBI has cut interest rates outside the regular policy reviews.

Last time on January 15, it had cut the repo rate by 0.25 per cent to 7.75 per cent.

“Softer readings on inflation are expected to come in through the first half of 2015-16 before firming up to below 6 per cent in the second half.

“The fiscal consolidation programme, while delayed, may compensate in quality, especially if state governments are cooperative.

“Given low capacity utilisation and still-weak indicators of production and credit offtake, it is appropriate for the Reserve Bank to be pre-emptive in its policy action to utilise available space for monetary accommodation,” Rajan said.

The RBI said growth is showing signs of pick-up and retail inflation at 5.1 per cent in January is well below the target.

Rajan said the need to act outside the policy review cycle was prompted by two factors – the data supports the policy stance as well as for providing RBI’s guidance for inflation targeting. .