India’s central bank surprised the market on Thursday by cutting the key interest rate by 25 basis points in a bid to boost economic growth amid easing inflation.
The benchmark Sensex rose 2 percent in early trading while banking stocks gained as much as 5 percent.
The move is expected to herald a steady easing of monetary policy this year, the Financial Times reported.
Raghuram Rajan, governor of the Reserve Bank of India, cited declining inflationary pressures for the decision to cut the policy repo rate to 7.75 percent from 8 percent.
Wholesale price inflation has been at or close to zero for two months, while consumer price inflation stood at 5 percent in December, well within the central bank’s targets, the newspaper said.
“Since July 2014, inflationary pressures [measured by changes in the consumer price index] have been easing … Inflation outcomes have fallen significantly below the 8 percent targeted by January 2015. On current policy settings, inflation is likely to be below 6 percent by January 2016,” Rajan said.
“These developments have provided headroom for a shift in the monetary policy stance.”
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