RBI cuts repo rate by 25 bps to 7.75%; cash reserve ratio left unchanged at 4.0%

In a surprise move ahead of the monetary policy on February 3, the Reserve Bank of India has cut the key policy rate by 25 bps to 7.75 per cent.

The repo rate has been reduced to 7.75 per cent from 8.0 per cent with immediate effect, RBI said in a statement early Thursday.

Banks' cost of funds have already moving lower. Rates to the end-user shld also move further lower as the RBI forces the hand of the banks.

— lokeshwarri sk (@lokeshwarri) January 15, 2015

The cash reserve ratio (CRR) was kept unchanged at 4.0 per cent.

Consequently, the reverse repo rate under the liquidity adjustment facility stand adjusted to 6.75 per cent. The marginal standing facility (MSF) rate and the bank rate stand at 8.75 per cent with immediate effect.

"Since July 2014, inflationary pressures (measured by changes in the consumer price index) have been easing. The path of inflation, while below the expected trajectory, has been consistent with the assessment of the balance of risks in the Reserve Bank’s bi-monthly monetary policy statements," the central bank said.

Radhika Rao, Economist, DBS Bank, India, said: "Today’s cut possibly paves the way for another 50bps cuts heading into FY16, provided the pre-conditions of quality fiscal correction and waning inflation risks hold."

"In the meantime, an eye needs to be kept on the narrowing (domestic) output gap and shifts in the US rate hike expectations. If domestic recovery takes longer, inflation remains weak and/or US rate hike concerns peter out in the coming months, there is room for a bigger scale of cuts than currently priced-in," Rao added.

The consumer price index (CPI) inflation had risen slightly to 5 per cent in December from 4.38 per cent in the preceding month.

Reversing a six-month declining trend, the WPI inflation moved up marginally to 0.11 per cent in December mainly due to increase in the prices of food items.

Despite the above figures, the inflation remains well within the RBI target of 6 per cent inflation by January 2016.

Industry Inc has been waiting for an interest rate cut to get cheaper loans.

The FICCI President, Jyotsna Sufi, had said, "To give a boost to the capex cycle, there is an urgent need for lowering of lending rates. Since the inflation is largely under control, we urge the RBI to ease the monetary policy.''

The RBI statement said: "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."

On current policy settings, inflation is likely to be below 6 per cent by January 2016. These developments have provided headroom for a shift in the monetary policy stance, the RBI said.

The central bank had earlier said that key to further easing is the data that confirm continuing disinflationary pressures.

RBI has lived up to its commitment made in December policy that if the current inflation momentum and changes in inflation expectations continue, and fiscal developments are encouraging, a change in the monetary policy stance is likely early next year, including outside the policy review cycle.

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