India central bank cuts key interest rate as inflation eases

AP News
Posted: Mar 04, 2015 1:00 AM

NEW DELHI (AP) — India's central bank on Wednesday unexpectedly cut a key interest rate by a quarter percentage point, the second such reduction this year as the bank lends support to government efforts to boost economic growth.

The latest cut lowers the policy repo rate, at which commercial banks can borrow from the Reserve Bank of India, to 7.5 percent. The Reserve Bank of India also cut the rate by a quarter point in January.

Previously, the central bank was reluctant to lower interest rates because doing so would likely worsen stubbornly high inflation. But India's inflation rate has fallen substantially in recent months as global oil prices have dropped sharply.

"Softer readings on inflation are expected to come in" over the next year, RBI governor Raghuram Rajan said in a statement.

Inflation in January was 5.1 percent, well below the government's upper limit of 8 percent for the month.

India's economic growth averaged about 8 percent a year in the decade up to 2010 but slumped to about 5 percent in the following years. Unpredictable government policy decisions, widespread corruption and other problems hindered business investment, causing growth to slump.

India's Prime Minister Narendra Modi won national elections in May by a staggering majority on the back of a promise to revive the country's sputtering economy and create more jobs.

The RBI's recent rate cuts have taken place outside of scheduled meetings and have surprised financial markets. The Sensex stock index in Mumbai was up 0.9 percent at 29,857.40 at 0540 GMT.

The central bank's move comes days after India's Finance Minister Arun Jaitley announced in the new government's first annual budget that it would boost spending to jumpstart Asia's third-largest economy.

Jaitley also promised to keep a tight watch on fiscal deficit. But he said that the need for higher public spending on infrastructure meant that the government would reach its fiscal deficit target of 3 percent of the GDP in three years rather than the two years earlier targeted.