India Reduces Rates 50 BPS to Boost Growth

India’s central bank cut its main interest rates by 50 basis points on Tuesday – its first reduction in three years – but said there was limited scope for further easing.

The Reserve Bank of India (RBI) said the benchmark repo rate, at which it lends to commercial banks, would fall to 8.0 per cent and the reverse repo rate, which it pays banks for deposits, would fall to 7.0 per cent.

“The reduction in the repo rate is based on an assessment of growth having slowed below its post-crisis trend rate,” the RBI governor Duvvuri Subbarao said.

The central bank had hiked interest rates 13 times from March 2010, undertaking the most aggressive monetary policy tightening drive of all major economies. Rates have been on hold since December last year.

The stock markets cheered the rate cut, with the benchmark 30-share Sensex index comprising blue-chips up 0.72 percent at 17,274.54 points.

The bank’s decision comes as India’s inflation climbed unexpectedly in March, data showed on Monday, fuelled by rises in food and fuel prices.

Business leaders had been clamoring for interest rates to be reduced to boost the economy, which is expected by the government to grow 6.9 per cent in the current year to March 31, its slowest pace since the 2008 global financial crisis.

“This (rate cut) is a more strong and definitive move. We could however expect the bank to pause in rates from here on,” said Siddhartha Sanyal, chief India economist at Barclays Capital, AFP reported.