The Reserve Bank of India is full of surprises.
Earlier this year, the central bank reduced the policy repo rate by 25 basis points and indicated that "key to further easing are data that confirm continuing disinflationary pressures. Also critical would be sustained high quality fiscal consolidation."
Now the RBI has done it again, firmly setting the tone for a reduction in lending rates by banks.
The policy repo rate under the liquidity adjustment facility (LAF) is cut by 25 basis points to 7.5% from 7.75%. The reduction will come into effect immediately.
The RBI has, however, kept the cash reserve ratio (CRR) of scheduled banks unchanged at 4% of net demand and time liabilities (NDTL).
Going forward, the RBI will seek to bring inflation rate to a mid-point of the band of 4% by the end of a 2-year period starting fiscal year 2016-17.
According to Rajan, "The need to act outside the policy review cycle is prompted by two factors: First, while the next bi-monthly policy statement will be issued on April 7, 2015 the still weak state of certain sectors of the economy as well as the global trend towards easing suggests that any policy action should be anticipatory once sufficient data support the policy stance. Second, with the release of the agreement on the monetary policy framework, it is appropriate for the Reserve Bank to offer guidance on how it will implement the mandate."
To read Raghuram Rajan,'s views in detail, click here.
