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 A Reuters poll last week showed only one out of 51 economists had
expected a 50 basis points cut in the repo rate <INREPO=ECI>, while
45 had expected a 25 bps cut, the same magnitude as previous three
cuts this year.
"I don't think we have been excessively aggressive," RBI Governor
Raghuram Rajan told a news conference, explaining that falling
global commodity prices had helped the RBI "front-load" the easing.
"Clearly this was about, given the state of the economy, how can we
move forward," he added, reflecting widespread concern that growth
was losing momentum.
At the same time, the RBI, in a statement written by Rajan,
announced a slew of measures intended to further open debt and
currency markets, signaling confidence in an economy expected to
fare better than emerging market peers once U.S. interest rates are
raised for the first time in nearly a decade.
The benchmark 10-year Indian government bond yield <IN10YT=RR>
dropped as much as 17 bps to 7.56 percent, its lowest level since
mid-July 2013, but share indexes edged lower, tracking global
markets.
The RBI justified the bigger rate reduction, saying consumer
inflation was likely be running at 5.8 percent in January, below the
6 percent target, thanks partly to the government's efforts to
contain food prices. Inflation dropped to a record low of 3.66
percent in August.
Analysts said the prospect of additional easing was unlikely for a
while, with the focus now likely to shift to a government that has
struggled to get its reform policies past parliament.
The bigger rate cut "highlights the central bank's concern over the
underlying growth momentum, especially given the disappointing
reform progress and leveraged banks, corporates," said Radhika Rao,
an economist at DBS in Singapore.
Calls for lower rates began to grow louder after the economy grew by
a slower-than-expected annualized rate of 7 percent in the
April-June quarter - faster than China, but well below the
government's target of 8 to 8.5 percent for the year ending in
March.
Reflecting the soft going, the RBI lowered its own growth forecast
for the fiscal year to 7.4 percent from 7.6 percent previously.
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ENCOURAGING FOREIGN INVESTORS in BONDS
Cutting interest rates during the monsoon season, running from
mid-June through September, is unusual for the RBI as it has tended
to be on the defensive against food price pressures after
disappointing rains. This is the first cut during that period since
the repo rate was adopted as the policy rate in 2004.
This was also the biggest rate move taken by Rajan since he took the
helm in September 2013. All his previous moves, up or down, had been
by a magnitude of 25 bps.
The RBI said it would now target consumer inflation at around 5
percent by March 2017, while striving to keep real interest rates
benchmarked to a 1-year Treasury bill rate of between 1.5 to 2
percent.
Rajan also announced a slew of measures to develop markets, a key
objective for the former chief economist of the International
Monetary Fund.
The measures included increasing the current $30 billion limit for
foreign investments in government bonds by 1.2 trillion rupees
($18.13 billion) by March 2018 in stages, and allowing overseas
funds to buy debt issued by Indian states.
"The steady relaxation for foreign investors in government
securities is also a big positive for Indian debt market. I see a
sustainable rally in bonds. The stance of RBI is leaning towards
dovish side," Killol Pandya, head of fixed income at Peerless Funds
Management in Mumbai, said.
($1 = 66.1800 Indian rupees)
(Reporting by Suvashree Dey Choudhury and Rafael Nam; Editing by
Simon Cameron-Moore)
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