India Cuts Key Rate By 50 Bps

India’s central bank slashed its key repo rate by 50 basis points to 6.75% at its September policy meeting, describing the decision as a “front-loaded policy action” that was twice the size expected by the markets. If inflation is low, it will position the OCR below the neutral rate.

A rate cut is being seen as a key trigger to boost investment demand in an economy where credit growth has dipped to a multi-year low. The marginal standing facility (MSF) rate and the bank rate now stood at 7.75%.

For latest news on mobile and tablet, download IndiaTV Android app and iOS app.

The RBI expects the January 2016 target of 6 percent inflation is likely to be achieved.

India’s central bank aggressively cut interest rates on Tuesday in a bid to kickstart economic growth, following a sharp drop in inflation. DS Rawat, secretary general, Associated Chambers of Commerce and Industry of India (Assocham), said, “The trouble has been aggravated by a high level of debt in the private sector which makes it onerous for the companies to service the debt”.

Retail inflation fell to a record low of 3.66% in August, and could well stay under Rajan’s self-imposed target of 6% by January 2016.

Continuing its deflationary trend, which shows how the pricing power with the manufacturers has been curtailed, the WPI inflation plunged to a historic low minus 4.95 per cent in August, though helped by the cheaper global commodity rates.

Given our year-ahead projections of inflation, this ensures one year expected Treasury bill real interest rates of about 1.5-2%, which are appropriate for this stage of the recovery, ‘ the RBI Governor said.

Drew said there were signs of strength in the economy that the Reserve Bank acknowledged but was not yet acting on, which could drive it to want to bring rates closer to a neutral position. This should be done before the U.S. Federal Reserve decides to raise its own interest rates, which will cause a crowding out of investments from emerging markets into fixed income US treasury bonds & USA dollar-denominated assets.

Meanwhile, the reports also highlighted the fact that because of the global turmoil which has been triggered by yuan devaluation and have slowed the china;’ growth pace has undeniably impacted Indian currency and stock markets.