India surprises markets with interest rate cut

India’s central bank has taken markets by surprise this morning (March 4th) by cutting its key lending rate for the second time this year. The Reserve Bank of India (RBI) has reduce its main repurchase rate by 0.25 percentage point to 7.5 per cent.

It said softer inflation and the government's commitment to fiscal discipline were factors behind the move. "The still-weak state of certain sectors of the economy as well as the global trend toward easing suggest that any policy action should be anticipatory. Disinflation is evolving along the path set out by the Reserve Bank in January 2014 and, in fact, at a faster pace than earlier envisaged," said Governor Raghuram Rajan.

He said that while the government's decision to slow its pace of fiscal consolidation was a potential concern, there was a "welcome intent to shift from spending on subsidies to spending on infrastructure, and to further reduce and better target subsidies through direct transfer".

Curbing inflation

The move comes after the government delivered its first annual budget last week and days after the central bank and government agreed to introduce inflation targets.

The RBI said its goal was to drive inflation below eight per cent in January, but a fall in oil and commodity prices globally helped India curb inflation to 5.1 per cent at the start of 2015, according to figures quoted by the Wall Street Journal.

India's economy has been growing faster than previously thought, and the government said it expects GDP to expand 7.4 per cent for the year ending March 31st.

Indian stocks reached all-time high after the RBI announcement, but the benchmark S&P BSE Sensex index ended the day down 0.7 per cent. The rupee strengthened against the dollar in the morning but ended the day about 0.5 per cent weaker.