India’s central bank cuts key interest rate to 6.75%

India’s central bank on Tuesday cut its key interest rate by half a percentage point, aiming to spur economic growth as inflation cooled to the lowest since November.

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Besides, leading private banks ICICI and Axis Bank also indicated that they would bring down the lending rates while public sector Andhra Bank cut interest rate by 0.25 per cent.

Speaking to Bloomberg TV India, SBI chairman Arundhati Bhattacharya said the bank will lower base rate by 40 bps to 9.30 per cent on October 5, even though cost of funds have not come down significantly.

“The front loading of rate cuts brings real rates in line with the RBI’s expectations, with further cuts contingent on fiscal policy and transmission”, said Singapore-based economist Deepali Bhargava at Credit Suisse, adding that this is probably the last cut until March 31. “When I say a large part of the repo rate will get transmitted, it should mean more than half”. In the monetary policy statement of April 2015, the Reserve Bank said that it would strive to reach the mid-point of the inflation band by the end of fiscal 2017-18.

No change in the cash reserve ratio (CRR) of scheduled banks from four percent of net demand and time liability (NDTL).

The GDP growth target for the financial year 2016 has been lowered to 7.4 per cent from 7.6 per cent. The Central Bank also warned that the poor monsoon would be an impediment in controlling inflation.

The RBI’s policy has achieved a twin objective of protecting the rupee through greater foreign investments in government securities and allowing domestic banks to lend more, Deven Choksey, managing director at KR Choksey Securities said. We now appeal banks to pass on the rate reduction to consumers. RBI’s announcement follows months of pressure from the government and India Inc to cut rates, which have argued that lower rates are critical to kick-starting the investment cycle, which in turn will help boost growth.

Experts as well as the markets were expecting a rate cut of 25 basis points.

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The RBI said the monetary policy has to be accommodative to the extent possible in current conditions. The rationale behind the move was to prevent a Brazil-like situation, where the a radical decrease in repo rate lead to an over-excess flow of money in the market, which in-turns to lead to an escalating inflation.

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