Mumbai, September 29

The Reserve Bank of India (RBI) cut its policy interest rate to a four-and-a-half year low of 6.75 per cent today, in a bigger-than-expected move that, with inflation running at record lows, could help an economy in danger of slowing down.

A Reuters poll last week showed only one out of 51 economists expected a 50 basis points cut in the repo rate, while 45 expected a 25 bps cut.

“I don’t think we have been excessively aggressive,” RBI Governor Raghuram Rajan said, explaining that falling global commodity prices had helped RBI ‘front-load’ easing. “Clearly this was about, given the state of economy, how can we move forward.”

At the same time, the RBI, in a statement written by Rajan, announced a slew of measures intended to further open debt and currency markets, signalling confidence in an economy expected to fare better than emerging market peers once US interest rates are raised for first time in nearly a decade.

The RBI justified the bigger rate reduction, saying consumer inflation was likely to be running at 5.8 per cent in January, below six per cent target, thanks partly to government’s efforts to contain food prices. Inflation dropped to a record low of 3.66 per cent in August.

The bigger rate cut ‘highlights central bank’s concern over the underlying growth momentum, especially given the disappointing reform progress and leveraged banks, corporates’, said Radhika Rao, an economist at DBS in Singapore.

RBI lowered its own growth forecast for the fiscal year to 7.4 per cent from 7.6 per cent previously. Rajan also announced a slew of measures to develop markets, a key objective for former chief economist of International Monetary Fund.

The measures included increasing the current $30 billion limit for foreign investments in government bonds by INR 1.2 trillion by March 2018 in stages, and allowing overseas funds to buy debt issued by Indian states.