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 The Reserve Bank of India's quarter point reduction in the repo rate
to 7.25 percent was predicted by 35 of 48 analysts polled by
Reuters. Previous cuts, in January and March, had also been by 25
basis points.
The reduction showed policymakers recognized the need to put the
economy on a sounder footing, regardless of data released on Friday
that showed India outpaced China by growing 7.5 percent in the March
quarter.
"We still have very weak investment. We haven't seen a strong
pick-up," RBI Governor Raghuram Rajan told a newsconference, adding
that there were factors to suggest that growth was weaker than the
headline numbers made out.
"In general, the corporate results have been quite weak also
suggesting that final demand is yet to pick up strongly," Rajan
said.
Many economists, inside and outside the government, suspect a new
way used to calculate gross domestic product has overstated how fast
India is rising.
Still, the RBI did not take any new steps to free up cash-strapped
commercial banks' liquidity, which bankers had said were needed for
them to lower lending rates further and pass on the benefits of
monetary easing to the broader economy.
Instead, with growth in bank lending at its lowest in almost two
decades, the RBI bank urged banks to reduce rates quickly.
"Meanwhile, banks should pass through the sequence of rate cuts into
lending rates," the RBI said in its statement.
EASING OVER OR ROOM FOR MORE?
Markets had already discounted the RBI cut. After the move the
broader NSE share index stood 1.4 percent down from Monday's close.
India's benchmark 10-year bonds fell 3 basis points to 7.85 percent,
and the rupee was little changed at 63.77 per dollar, having ended
Monday at 63.72.
Analysts were split about whether the RBI would ease further. A
recent Reuters poll had shown most analysts expected another 25
basis points cut between October and December.
The RBI warned it would closely track inflationary trends, citing
risks posed to food prices if monsoon rains are weaker than
expected, or global crude prices recover, or the rupee weakens due
to volatility in global markets.
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Consumer price inflation hit a four-month low of 4.87 percent in
April, well within the RBI's target range of 2 to 6 percent.
But the central bank also projected inflation would rise to 6.0
percent in January 2016, setting up the possibility of no more rate
cuts this year.
For now, the rate reduction answered calls from both the government
and businesses for the RBI to do more to help growth gather
momentum.
Investors are hoping that Prime Minister Narendra Modi's economic
reforms and aggressive spending on infrastructure will take the
under achieving economy to another level.
The latest rate reduction showed the RBI's confidence that that
India was in good shape to withstand any market turbulence when the
Federal Reserve finally decides to raise interest rates, as it is
expected to do later this year.
The RBI cut came just weeks after China made its third interest rate
reduction in six months, but growth in India's giant neighbor has
been slowing down.
Having embarked on an easing cycle in January, the RBI's latest move
also completed a reversal of the rate increases ordered by Rajan
between September 2013 to January 2014, when India was suffering
double-digit inflation.
"I would characterize the policy today as neither conservative nor
aggressive. In some sense, it is a Goldilocks policy: just right
given the current situation," Rajan said.
(Editing by Simon Cameron-Moore)
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