Indian business community welcomes surprise interest rate cut

The Reserve Bank of India lowered the key interest rate, or repo rate, by 25 basis points to 7.75 per cent from 8 per cent. Divyakant Solanki / EPA

MUMBAI // India’s central bank cut interest rates yesterday in a surprise move to help kick start consumer spending and boost a flagging economy.

Rate cuts this year have been widely anticipated but few thought the reduction – the first in 20 months – would come so soon. The Reserve Bank of India (RBI) lowered the key interest rate, or repo rate, by 25 basis points to 7.75 per cent from 8 per cent.

According to World Bank forecasts, India’s GDP expanded 5.6 per cent last year, down from 10.3 per cent in 2010.

The RBI governor, Raghuram Rajan, also suggested that there could be more cuts to come if inflationary pressures remained low.

The rate cut was “a pleasant surprise”, said Kiran Kumar Kavikondala, the director and chief executive of WealthRays Securities, a research and advisory firm based in Bangalore. “Banks may lower lending rates in the near term which will boost consumption.”

Soaring inflation and slowing economic growth have been major challenges for India over the past few years. But government data released on Wednesday showed that the wholesale price index, the main gauge of inflation, rose last month by just 0.11 per cent compared with December 2013. Wholesale prices were flat in November. Lower oil and food prices have been major factors in cooling inflation.

India’s business leaders have long been crying out for rate cuts to spur the economy.

“This signals a certain confidence that the RBI is showing in longer-term trends on the fiscal front and a leading signal of a victory over the inflation dragon,” said Tushar Pradhan, the chief investment officer at HSBC Global Asset Management, India.

“This rate cut, while not significant on a basis point criteria, can be taken by the markets as a signal to a rate lowering cycle.”

Markets cheered the move. The benchmark Sensex in Mumbai gained 2.6 per cent at 28,075.55. The rupee strengthened against the US dollar to as much as 61.48 during trading yesterday, compared with a close of 62.18 the previous day.

Car sales and home sales could be boosted by cheaper loans, particularly if the RBI continues cutting rates.

“This could not have come at a better time as we have already started to witness signs of revival in the real estate industry,” said Hariprakash Pandey, the vice president of finance and investor relations at HDIL, a property developer based in Mumbai. “We expect customer sentiment to improve, and going forward, interest costs of companies will also come down.”

Jyotsna Suri, the president of the Federation of Indian Chambers of Commerce and Industry (FICCI), had also been among those calling for rate cuts.

“Cost of finance is an important factor for giving a boost to the industrial sector, which has been under stress for a long time now,” she said.

The move is set to prompt an improvement in investor sentiment.

“The RBI rate cut signals the turnaround in the economy to the positive side,” said S Ramasamy, the chief investment officer for debt at LIC Nomura Mutual Fund. “This may be followed up by rating agencies for a rating upgrade for India, which will propel more FII [foreign institutional investor] flows into the country, making the Indian currency stronger and stable.”

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