Agencies
Mumbai
The Reserve Bank of India (RBI) cut its policy interest rate to a 4-1/2 year low of 6.75 percent on Tuesday, in a bigger-than-expected move that, with inflation running at record lows, could help turn around an economy that has been slowing down.
"I don't think we have been excessively aggressive," RBI Governor Raghuram Rajan told a news conference, explaining that the RBI had "front-loaded" the easing in response to downgrades to expectations for global growth.
The RBI cut its growth forecast for the fiscal year to 7.4 percent from 7.6 percent previously, well below the government's target of 8 to 8.5 percent, but still faster than China.
The central bank said it expects inflation to rise from August's record low of 3.66 percent to 5.8 percent in January, just below its 6 percent target.
It also set a new inflation target of around 5 percent by March 2017, and Rajan said the RBI would strive to keep real interest rates benchmarked to a 1-year Treasury bill rate of between 1.5 to 2 percent.
At the same time, the RBI announced a slew of measures intended to further open debt and currency markets, signalling confidence in an economy expected to do better than most emerging market peers when U.S. interest rates eventually go up for the first time in nearly a decade.
The measures included increasing the current $30 billion limit for foreign investments in government bonds by Rs 1.2 trillion ($18.13 billion) by March 2018 in stages, and allowing overseas funds to buy debt issued by Indian states.
The benchmark 10-year government bond yield dropped as much as 17 bps to 7.56 percent, its lowest level since mid-July 2013, while share indexes surged more than 1 percent after initial falls. The rupee was broadly unchanged.
While there had been calls from within Modi's cabinet for the RBI to cut rates more aggressively, most analysts doubted whether Rajan had succumbed to pressure.
Certainly Rajan gave the impression of being his own man when asked whether he felt like Santa Claus during the news conference.
"My name is Raghuram Rajan, and I do what I do," the governor responded in a remark that gained extensive mileage on social media.
Reducing rates during the monsoon season, running from mid-June through September, is unusual for the RBI. It has tended to be on the defensive against food price pressures after disappointing rains. This is the first cut during that period since the repo rate was adopted as the policy rate in 2004.
Country's largest lender State Bank of India (SBI) slashed its minimum lending or base rate by 0.4 percent to 9.3 percent, setting the trend for benign interest rate regime after RBI cut rates on Tuesday.
With the reduction in the base rate, all loans, including home, auto and corporate, would become cheaper by at least 0.40 percent.
The bank has decided to reduce the base rate by 0.40 per cent to 9.3 percent with effect from October 5, SBI said.
The bank will also be cutting fixed deposit rates by 0.25 percent across various maturities from October 5, SBI Chairperson Arundhati Bhattacharya said.
With the reduction, SBI's base rate is now the lowest in the market. The reduction by the largest lender is likely to be followed by others.
Former Finance Minister P Chidambaram on Tuesday welcomed the 0.50 per cent cut in interest rate announced by the Reserve Bank of India (RBI) saying it was overdue.
“I welcome the decision of RBI to reduce the repo rate by 50 basis points. This was perhaps overdue.
“Nevertheless, it signals a movement towards a lower interest rate regime and it is therefore welcome,” he said. He said more policy steps by RBI were possible if the government stayed firmly on path of fiscal consolidation.
In efforts to move towards a cashless society, the Reserve Bank of India on Tuesday said it will come out with a concept paper on promoting electronic payments, especially in smaller towns, by the end of November.
"With growing financial inclusion, there are concerted efforts to enhance the use of technology and move towards a 'less-cash' society."
In its fourth bi-monthly monetary policy statement, the RBI also said it has issued banknotes of Rs 100, Rs 500 and Rs 1,000 denomination with a new numbering pattern with ascending order of the size of the numbers from left to right.
Further, with a view to making identification of banknotes easier for visually challenged persons, the process for introduction of additional identification marks has been initiated and is being introduced in Rs 100, Rs 500 and Rs 1,000 notes.
