India's central bank has lowered its benchmark interest rates for the second time in 2015, citing the country's good economic climate to go for pro-growth measures.
The repo and reverse repo rates have both been reduced by 25 basis points, to 7.50% and 6.50% respectively. At the same time, the marginal standing facility rate has been lowered by 25 basis points to 8.50%, while the statutory liquidity ratio and cash reserve ratio have been left unchanged at 21.5% and 4.0% respectively.
"Softer readings on inflation are expected to come in through the first half of 2015-16 before firming up to below 6% in the second half. The fiscal consolidation programme, while delayed, may compensate in quality, especially if state governments are cooperative," Reserve Bank of India (RBI) Governor Raghuram Rajan said in a statement, defending the move.
"Given low capacity utilisation and still-weak indicators of production and credit off-take, it is appropriate for the Reserve Bank to be pre-emptive in its policy action to utilise available space for monetary accommodation."
When the central bank lowered the repo rate by 25 basis points in January, it noted that it might further reduce rates if there was data confirming continued disinflationary pressures. Official data showed that inflation in January was at 5.1%, well within the target of 8% for January 2015.
Earlier, the government unveiled its 2015/16 budget which laid out plans to reduce the fiscal deficit to 3.9% of gross domestic product by next fiscal year from 4.1% in the current fiscal year.
"This is actually a slower pace of fiscal consolidation than the finance ministry had previously envisaged. But plans to ramp up capital expenditure while keeping growth in current expenditure (such as on public sector wages and subsidies) low appear to have been enough to satisfy the RBI," said Shilan Shah at Capital Economics.
"Looking ahead, the loosening cycle still has further to run. For a start, the inflation picture remains comfortable. Consumer prices rose 5.1% y/y in January, well below the RBI's 6% target for January 2016," Shah added.