Reserve Bank of India on Tuesday cut its key interest rate by 50 basis points to 6.75 per cent, lowest since May 2011 and the repo rate by 50 basis points to 6.75 per cent.
In the fourth bi-monthly Monetary Policy Statement for 2015-16, Governor Raghuram Rajan also announced a downward revision, the second this year, in the Reserve Bank’s growth projection for the year—to 7.4 per cent from the earlier >7.6 per cent .
The Governor said that underlying economic activity remains weak on account of sustained decline in exports, rainfall deficiency and weaker-than-expected momentum in industrial production as well as investments. Surveys also show that business sentiment has been falling in recent quarters, he said. “In India, a tentative economic recovery is underway, but it is still far from robust.”
The inflation target set in the Monetary Policy Agreement, between the Modi Government and the Reserve Bank, of 6 per cent for January 2016 will be achievable, Dr. Rajan said. Inflation would in fact be a shade lower at 5.8 per cent in January, he said.
Responding to the rate cuts, Finance Minister Arun Jaitley said, "RBI's rate cuts announced today will help India's economy reach its medium term potential. It means >inflation pressures are moderated significantly."
"The government will reassess the situation on RBI's downward revision of >India's growth projection for this year," he added. Chief Economic Advisor Arvind Subramanian who was also present at the press conference said that the government is looking at transmission of RBI's rate cuts to rest of the economy and will work with it on this.
According to him, RBI is now in a comfort zone on inflation and is in a position to provide support to the economy.
