As was widely expected, India's Monetary Policy Committee (MPC) cut interest rates or repo rates for a second consecutive time on Thursday, as inflation remains in check and growth has weakened.
The Repo rates or rates at which the Reserve Bank of India lends money to banks has now dropped to 6 per cent. Today's interest rate cut may prompt banks and Non-Banking Financial Companies (NBFCs) to cut interest rates going forward.
"These decisions are in consonance with the objective of achieving the medium-term target for consumer price index (CPI) inflation of 4 per cent within a band of +/- 2 per cent, while supporting growth," the RBI said in a release.
Today 's move was largely on expected lines, given that Inflation bottomed out at about 2 percent in January before picking up to 2.6 percent in February. This is way below the RBI's own target, thanks to lower food prices.
Inflation expectations, measured by the Reserve Bank's survey of households, declined in the February round over the previous round by 40 basis points each for the three months ahead and for the one year ahead horizons. Firms participating in the Reserve Bank's industrial outlook survey of manufacturing companies reported a reduction in input price pressures, but they expected an increase in staff expenses in Q1:2019-20. Farm and industrial input costs increased at a slow pace in January-February 2019. Nominal growth in rural wages and staff costs in the organised manufacturing and services sectors remained muted in Q3:2018-19.
Stocks fell following the RBI's Monetary Policy, as the hopes were that the central bank would adopt a dovish stance. However, the country's central bank has stayed neutral and this may have largely to do with inflation edging higher in the coming days.
The Sensex was last seen trading at 38,724 points, while the Nifty dropped 40 points in trade.