The Reserve Bank of India (RBI) has cut interest rates by 25 basis points to 7.75 per cent as it tackles declining inflation.
Raghuram Rajan, governor on monetary policy at the RBI, announced an immediate reduction in the policy repo rate from 8 per cent to 7.75 per cent, citing lower-than-expected inflation.
India’s central bank noted that lower inflation had been enabled by a sharp decrease in the price of fruit and vegetables since September last year and the fall in international commodity prices, in particular crude oil.
Mr Rajan said: “These factors have significantly reduced the momentum of inflation, compensating for the widely anticipated ending of favourable base effects.
“Households’ inflation expectations have adapted, and both near-term and longer-term inflation expectations have eased to single digits for the first time since September 2009. Inflation outcomes have fallen significantly below the 8 per cent targeted by January 2015.”
He added: “On current policy settings, inflation is likely to be below 6 per cent by January 2016.”
The rate cut caught markets by surprise, although the RBI had previously indicated that it would begin monetary easing should data suggest that medium term inflationary targets would not be met.
