In a surprise move, the Reserve Bank of India, or RBI, cut its repo rate by 25 basis points to 7.75%. The RBI added it could cut interest rates further should inflation continue to ease, while it would also monitor the government’s progress on fiscal consolidation.
The central bank cited lower-than-expected inflation, weak crude prices and weak demand as the reasons for its move. The rate cut is not a game changer but very significant because it indicates that the RBI is fairly confident of a global deflationary trends and believes that the government is committed to sticking to its fiscal deficit target.
According to Indranil Pan, chief economist at Kotak Mahindra Bank, "With the first rate cut done, we expect the RBI to stay on course for more cuts of 25 bps each in the near future. Key domestic events for the RBI are the Union Budget where a high quality fiscal consolidation is sought. Given that the fiscal is in order we would expect the next cut to be in the first week of March, after the Union Budget in February."
Many are of the opinion that if global commodity prices remain soft, inflation is brought to heel, and fiscal consolidation continues, the RBI could cut rates by an additional 75 bps over this calendar year.
