Reserve Bank of India Governor Raghuram Rajan cut interest rates in an unscheduled review in order to revive growth in Asia’s third-largest economy after inflation eased. Stocks, bonds and the rupee surged on the news.
Rajan lowered the benchmark repurchase rate to 7.75 percent from 8 percent, the first reduction since May 2013. Consumer-price inflation will probably be below the central bank’s target of 6 percent by January 2016, according to Rajan.
“Key to further easing are data that confirm continuing disinflationary pressures,” Rajan said in the statement. “Also critical would be sustained high quality fiscal consolidation as well as steps to overcome supply constraints and assure availability of key inputs such as power, land, minerals and infrastructure.”
Focus on Lowering Inflation
The Indian Governor has focused on quelling inflation since taking office in September 2013, and today’s move signals confidence that price pressures will remain under control. It sets India on a different path from Brazil and Russia, which raised rates in December to tame inflation and support their currencies.
The benchmark S&P BSE Sensex index rose 1.6 percent as of 10:13 a.m. in Mumbai, the best performer in Asia. The rupee strengthened as much as 0.8 percent to 61.72 per dollar, the strongest since November. The yield on the benchmark 10-year sovereign bond dropped 10 basis points to 7.67 percent, the lowest since July 2013.
Rajan had signaled possible easing early in 2015. The central bank doesn’t “intend to flip flop” once it moves, he said. The next scheduled review is Feb. 3.
“This does signal a shift in the underlying stance going forward,” Arvind Subramanian, the chief economic adviser to India’s finance ministry, told CNBC today. “It shouldn’t just be seen as one cut.”