MUMBAI - India's central bank lowered its policy repo rate by 25 basis points to 7.5 percent on Wednesday, its second inter-meeting cut this year on the back of easing inflation and what it said was the "weak state" of parts of the economy.
Although markets had broadly expected the Reserve Bank of India to cut rates again after its surprise January easing, few had expected a move as early as this week, just days after the government presented its annual budget for the coming fiscal year.
"Given low capacity utilisation and still-weak indicators of production and credit off-take, it is appropriate for the Reserve Bank to be pre-emptive in its policy action to utilise available space for monetary accommodation," RBI Governor Raghuram Rajan said in a statement.
The cut comes days after the government and the Reserve Bank of India agreed to formally adopt inflation targeting, although the central bank had been effectively using targets since early 2014.
Analysts said the RBI's rate cut appeared to give backing to the government's fiscal plans and its pledge to exercise responsibility despite a delay in meeting a fiscal deficit target of 3 percent of gross domestic product by a year to 2017/18.
"The Reserve Bank of India is expressing its confidence on inflation outlook," said Radhika Rao, economist at DBS in Singapore. "This also means that despite a higher fiscal deficit, the quality of fiscal consolidation has satisfied central bank's expectations."
Indeed, in an otherwise cautious policy statement, central bank governor Raghuram Rajan said fiscal and monetary policy would work "in a complementary way": "The fiscal consolidation programme, while delayed, may compensate in quality, especially if state governments are cooperative," Rajan said.
Indian bonds and rupee rose sharply after the cut. The benchmark 10-year bond yield dropped to as much as 7.61 percent, its lowest level since July 15, 2013. The partially convertible rupee gained to as much as 61.65 to the dollar, its strongest level since Feb. 4.