RBI surprises market with much needed 50 basis repo rate cut

In yet other surprise move, the Reserve Bank of India (RBI) Governor, Raghuram Rajan on Tuesday (29th September), cut its key policy interest rate by 50 basis points to a 4 and half year low of 6.75 per cent on September 29, 2015.  The RBI justified the bigger reduction, as consumer inflation was likely be running at 5.8 per cent, below the 6 per cent target for January 2016. The RBI had previously cut interest rates three times during the year, lowering it by 25 basis points each time.

Rajan takes the repo rate to its lowest since March 2011. Since becoming Governor of the central bank in September 2013, Rajan has raised the repo rate three times and lowered it three times, all by a magnitude of 25 bps.

At the same time the central bank cut its economic growth forecast to only 7.4 per cent in FY16, lower than its previous 7.6 per cent projection.

RBI also said that it will be accommodative as possible given its inflation targets and with this 50 basis points rate cut. RBI expects CPI inflation to average around 5.5 per cent in October-December and 5.8 per cent in January-March 2016 and finally moderate to 4.8 per cent in January-March 2017.

The RBI has also said that foreign investment cap in government bonds will be relaxed in phases to 5 per cent by March 2018. A hike in foreign investment limit in bonds will be announced every March, September. The foreign investment limits in debt will be fixed in rupee terms.

This decision of cutting rates by 50 bps is definitely a  pro-growth move and is welcomed. A proper transmission of this will definitely help interest sensitive and debt laden companies.