India makes second unscheduled rate cut

India’s central bank has cut interest rates for the second time in less than two months, again at an unscheduled meeting, on the back of softening inflation. The move brings the repo rate down to 7.5 per cent.

Disinflation — and in some cases deflation — stalking the world has pushed scores of central bankers including those in Europe and China into easing mode even as, conversely, the US Federal Reserve prepares to start raising rates.

Raghuram Rajan, governor of the Reserve Bank of India, said cheaper vegetables and moderating inflation excluding food and fuel — now at a new low — had prompted the 25 basis-point cut in the repo rate.

Analysts also viewed the move as a vote of confidence in Saturday’s budget, designed to slow the pace of fiscal consolidation while stepping up public spending in infrastructure.

Finance minister Arun Jaitley’s first full budget since Narendra Modi’s government came to power in May was welcomed by investors, with one analyst describing it as “a fine balancing act between fiscal consolidation and creating enabling conditions for growth and job creation”.

Mr Rajan paved the way for cuts in December when he told markets he would not hesitate to act, “including outside the policy review cycle”.

He followed through with an unscheduled rate cut on January 15 but then held interest rates steady at the RBI’s February 3 meeting.

Announcing the latest cut on Wednesday, Mr Rajan said the need to act outside the policy review cycle had been prompted by two factors.

“First, while the next bi-monthly policy statement will be issued on April 7, the still weak state of certain sectors of the economy as well as the global trend towards easing suggests that any policy action should be anticipatory once sufficient data support the policy stance.

“Second, with the release of the agreement on the monetary policy framework, it is appropriate for the Reserve Bank to offer guidance on how it will implement the mandate.

The RBI maintained the cash reserve ratio at 4 per cent.

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