New Delhi: The Reserve Bank of India (RBI) on Tuesday cut its policy interest rate by an expected 25 basis points, bringing it to 6.5%, the lowest since January 2011.
"We see inflation slowing modestly and remaining around 5% for fiscal year 2017 with small inter-quarter variations," RBI governor Raghuram Rajan said. The RBI also sees an impact of the seventh pay commission on inflation, at 100-150 bps over the next two years.
The RBI retained the growth forecast of 7.6% in fiscal 2017.
It also increased the reverse repo rate by 25 basis points to 6% on account of new rate corridor and kept the cash reserve ratio unchanged at 4%.
With inflation easing to 5.18% in February and a central budget that kept both borrowing and spending in check, the RBI had room to make its first cut since September, thus resuming an easing cycle that was in full swing last year.
Last year, the RBI had reduced the repo rate by 125 basis points (bps) in total, but it had been frustrated by commercial banks' failure to pass on the full benefits of the reduced rate to the wider economy.
Banks only passed on about half of the RBI's rate reductions to borrowers, by saying tight liquidity in the financial system had their hands tied.
In addition, despite the RBI easing the rate last year more aggressively than at any time since the 2008-2009 global financial crisis, annual economic growth slowed to 7.3% in the October-December quarter from 7.7% in the previous quarter.
That slowdown meant the government's 8% growth target wasn't met; 8% was the rate needed to generate jobs for the millions of Indians joining the workforce every year.
In some positive news, though, a business survey published on Monday showed that Indian manufacturing activity expanded for the third straight month in March and at the fastest pace since July. This was thanks to stronger demand that allowed companies to raise prices at what was the fastest pace in 16 months.
