India's rate cut is more than expected

MUMBAI • India's central bank sliced interest rates more than expected to bolster the economy as China's slowdown threatens global growth and a commodity rout contains inflation.

Governor Raghuram Rajan cut the benchmark repurchase rate to 6.75 per cent from 7.25 per cent, the Reserve Bank of India (RBI) said in a statement yesterday, the lowest since May 2011.

"The weakening of global activity... suggests that commodity prices will remain contained for a while," Mr Rajan said. Stronger domestic demand is needed to substitute for weaker global growth, he said, adding that "monetary policy has to be accommodative to the extent possible" in current conditions.

"Investment is likely to respond more strongly if there is more certainty about the extent of monetary stimulus in the pipeline, even if transmission is slow," he said.

Mr Rajan had faced growing pressure from Prime Minister Narendra Modi's government to reduce one of Asia's highest borrowing costs as Indian growth and price pressures slowed.

He is looking to keep inflation within 6 per cent by January, 5 per cent a year later and near 4 per cent by early 2018.

Finance Minister Arun Jaitley, who has pushed for rate cuts, welcomed Mr Rajan's decision and said it "will significantly provide policy support to the real economy and help in the recovery process".

The ministry announced a plan to review a small savings programme that competes with banks for deposits to ensure faster transmission of rate cuts.

The benchmark stock index, which has fallen about 3 per cent over the past month, was up 1 per cent at noon.

"The front loading of rate cuts brings real rates in line with the RBI's expectations, with further cuts contingent on fiscal policy and transmission," said Singapore-based economist Deepali Bhargava at Credit Suisse, adding that this is probably the last cut until March 31. "The RBI seems to have done its bit now while passing the buck to the government and the banks."

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A version of this article appeared in the print edition of The Straits Times on September 30, 2015, with the headline 'India's rate cut is more than expected'. Print Edition | Subscribe