India’s central bank surprised markets with a cut to its key lending rate Thursday, stepping back from its inflation-fighting stance in a bid to help bolster sluggish growth in Asia’s third-largest economy. This was the second unscheduled move this year and the first rate reduction in nearly two years.
Governor Raghuram Rajan, facing growing pressure to lower borrowing costs, cut the benchmark repurchase rate to 7.5 percent from 7.75 percent. The decision came four days after Prime Minister Narendra Modi’s government shifted funding to infrastructure in its first full-year budget and agreed to a formal inflation target.
Rajan said that he made the move amid signs that India has been winning its long battle with inflation in recent months as oil and food prices have slid.
Referring to the monetary policy framework agreement, Rajan added, “This makes explicit what was implicit before –- that the government and the Reserve Bank have common objectives and that fiscal and monetary policy will work in a complementary way.”
Stocks Jump
India’s main stock index jumped more than 2%, and the rupee strengthened against the dollar on the announcement. Lower lending rates provide a new weapon in Prime Minister Narendra Modi ’s drive to pull India out its worst economic slowdowns in decades. Mr. Modi and his Bharatiya Janata Party rode to power in May on a pledge to revive investment, boost manufacturing and provide more jobs to younger Indians. But progress has been slow, and his government has so far introduced only modest changes.
India’s move underscores a strengthening cycle of global monetary easing outside the U.S., with Europe tomorrow forecast to unveil more about its quantitative-easing plans. More than a dozen central banks from Turkey to China have eased policy in 2015 as a slide in oil prices damps inflation.