The Reserve Bank of India (RBI) on Tuesday cut its key lending rate by a quarter of a percentage point in an attempt to prop up growth in the slowing economy, drawing comfort from wholesale price inflation staying under 7%.
The apex bank kept the cash reserve ratio (CRR) unchanged.
RBI lowered the repo rate, at which it lends short-term funds to banks, to 7.5%. CRR, the portion of deposits banks need to park with the RBI on a fortnightly basis, is currently pegged at 4%. The repo rate cut had been widely expected—22 of 24 market participants polled on Monday predicted a 25 bps repo rate cut.
The central bank last cut rates in January, when it reduced the repo rate and CRR by 0.25 percentage point each.
RBI has been cautious in lowering rates as it fights inflation in Asia’s third largest economy. Inflation based on wholesale prices has fallen below 7% in recent months after staying above that level throughout the past year. After easing to 6.62% in January, inflation inched up to 6.84% in February.
But core inflation, or non-food, non-oil manufacturing inflation eased significantly to 3.79% in February from 4.12% in January, giving room for RBI to cut rates, economists said.
The rate cut is aimed at boosting the sagging economy, which is expected to grow at 5% in the current fiscal, the slowest pace in a decade. Economic growth slowed to 4.5% in the December quarter from 5.3% in the preceding quarter.