India cuts interest rates to five-year low

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Source: BBC

India’s central bank has cut its key interest rate for the first time this year.

The Reserve Bank of India (RBI) reduced its repo rate to 6.5% from 6.75%, in line with the expectations of many economists.

The repo rate is the level at which the central bank lends to commercial banks.

The latest cut takes interest rates in the country to the lowest level in five years. The RBI cited a fall in inflation for the latest cut.

“Retail inflation measured by the consumer price index (CPI) dropped sharply in February after rising for six consecutive months,” said Raghuram Rajan, India’s central bank governor. The drop came largely from a bigger-than-anticipated fall in vegetable prices.

Analysts are factoring in more rate cuts to come, later in the year.

Mahantest Sabarad, from SBI Cap Securites in Mumbai, said: “We expect there could be further rate cuts ahead. One of the important data points that the governor had to work with is that there is a normal monsoon forecast … which is the first preliminary forecast.

“Therefore it tells me that there could be another rate cut by 25 basis points sometime during May-July.”

Analysis: Yogita Limaye, BBC Mumbai correspondent

The central bank’s rate cut today didn’t come as much of a surprise for anyone.

Most business leaders have been hankering for a much bigger reduction.

The boss of one of India’s private banks recently told me, he thinks there was a case to be made for a 0.75% rate cut given various economic factors.

Governor Raghuram Rajan has said that the bank’s monetary policy stance will remain “accommodative”, leading to expectations that there may be more rate cuts in the future if inflation continues to come down.

The RBI has cut rates by 1.5% since January 2015, but much of that has not been passed on to borrowers yet.

So perhaps the central bank’s most significant move has been to introduce a mechanism which forces banks to revise their lending rates in accordance with those of the RBI.

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