In a move that surprised the market the Reserve Bank of India (RBI) today cut repo rate by 50 basis points from 7.25 per cent to 6.75 per cent. Repo rates are the rates at which the country's central bank lends money to other scheduled commercial banks in the country and is also known as the RBI Bank Rate.
This was the fourth time this year in 2015 that the RBI decided to cut interest rates, making the drop a full 1.25 per cent this year.
Banking stocks which had fallen since morning on weak global cues, made a significant comeback with the bank index trading in the green. Analysts by and large expect another 25 basis points cut in the RBI's repo rate in the financial year 2015-16. WPI inflation had fallen to a historic low in the month of Aug, while CPI inflation was 3.75 per cent.
As was expected the central bank sounded dovish on future rate cuts as it would closely work with the government. "Despite the monsoon deficiency and its uneven spatial and temporal distribution, food inflation pressures have been contained by resolute actions by the government to manage supply. The disinflation has been broad-based and inflation excluding food and fuel has also come off its recent peak in June," the RBI said in a release.
It also sounded cautious on inflation saying that Sept could see a hike due to base effect coming into play.
Bond prices surged in trade following the cut in repo rates.
The Reserve Bank of India manages inflation and growth expectations through the repo rate. When inflation is high the bank hikes the rate, so as to tame inflation. On the other hand if rates are hiked it tends to adversely impact growth rates in the country.
The RBI these days tracks CPI inflation and not WPI inflation. There is a difference between WPI and CPI Inflation with it better to track the latter.
The current repo rate which was 7.25 per cent, now stands reduced to 6.75 per cent.