MUMBAI: India’s central bank aggressively cut interest rates on Tuesday in a bid to kick-start economic growth, following a sharp drop in inflation.

The move, designed to lower the cost of borrowing and investing, providing a boost to consumers and the economy, was immediately welcomed by Prime Minister Narendra Modi’s business-friendly government.

The Reserve Bank of India (RBI) surprised analysts by lowering the benchmark repo rate — the level at which it lends to commercial banks — to 6.75 per cent from 7.25pc with immediate effect.

Economists had been expecting a cautious 25-basis-point cut and the 50 basis point reduction means the repo rate is at its lowest since March 2011.

But it is still much higher than in that of other major economies, with the United States and Japan at record lows of near zero per cent. “In India, a tentative economic recovery is under way, but is still far from robust,” RBI governor Raghuram Rajan wrote in the bank’s monetary policy review for its meeting in Mumbai.

“Investment is likely to respond more strongly (and boost domestic demand) if there is more certainty about the extent of monetary stimulus in the pipeline, even if transmission is slow. “Therefore, the Reserve Bank has front-loaded policy action by a reduction in the policy rate by 50 basis points,” he added.

The announcement on Tuesday marked the fourth time this year that the RBI has cut rates, raising to 125 the number of basis points that the bank has lopped off borrowing rates in 2015. He said projected economic growth for 2015-16 was “marked down slightly to 7.4pc from 7.6pc earlier”.

He kept interest rates on hold last month and pressure had been growing on him to announce a further cut as the Indian government seeks to quicken the pace of growth in Asia’s third-largest economy.

“This decision of the RBI will significantly provide policy support to the real economy and help in the recovery process,” Finance Minister Arun Jaitley told reporters in New Delhi.

“We are looking forward now to the transmission of these cuts, which will effectively help to boost confidence and investment.”

Rajan said the cut was not the result of any government pressure.

“This rate cut is not a Diwali bonus, it is based on progress on (the) ground,” he told reporters. “I don’t know what you want to call me. Santa Claus or (a) hawk... My name is Raghuram Rajan and I do what I do.”

Modi swept to power in May 2014 on a pledge to reform and revive the economy to help provide jobs for India’s tens of millions of young people.

After a promising start, economic growth slowed to seven per cent in the first quarter of the current financial year, matching China and outpacing most major economies, but down from 7.5pc in the previous quarter.

Published in Dawn September 30th, 2015

On a mobile phone? Get the Dawn Mobile App: Apple Store | Google Play