Signalling that it is on the same page with the government, the Reserve Bank of India, on Wednesday, cut the repo rate by 25 basis points to 7.5 per cent.
The repo rate is the rate at which banks borrow funds from the central bank.
The rate cut comes within days of the Modi government’s first full-year budget.
This is the second time this year that the Raghuram Rajan-led RBI has chosen to effect rate cut outside of its scheduled policy meetings.
By doing so, Dr. Rajan has put pressure on reluctant banks to cut their lending rates. This time around, banks could be under intense compulsion to pass on the rate cut benefit to borrowers. Expectations are that the latest cut will result in lower EMIs (equated monthly instalments) on home, car and personal loans.
Markets went into an ecstatic mood when the rate cut was announced. Sensex zoomed past the psychological level of 30,000 for the first time, and Nifty scaled a record high of 9,119.20. Both indices shed all early gains at the fag-end of trading on profit-booking.
Reacting to Dr. Rajan’s rate action, a pleased Arvind Subramanian, Chief Economic Adviser to the government, said, “the government and the RBI share views on economic outlook and budget.”
Earlier in a statement, Dr. Rajan referred to “many important and valuable structural reforms embedded in the budget.” Soon after the rate cut, Dr. Subramanian tweeted that the Reserve Bank’s decision was welcome and good for the economy. Later, he told reporters that it was “also a sign that the budget is conducive to non-inflationary and durable growth.
Referring to the central bank’s agreement with the Centre for a new monetary policy framework that the Finance Ministry unveiled on Monday, Dr. Rajan said: “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.”
The RBI embarked on a monetary easing cycle on January 15 when, in a surprise unscheduled announcement, it cut the rate to 7.75 per cent from 8 per cent. The next policy review was slated for April.
However, the RBI turned pre-emptive in its policy action on Wednesday as, at 5.1 per cent in January, inflation was well within the target. “Disinflation is evolving along the path set out by the RBI , and, in fact, at a faster pace than earlier envisaged,” the Governor said, giving reasons for the rate cut.