Early cut in repo rates by 25 basis points, Sensex surges by 729 points - The Indian Express

The Reserve Bank of India on Thursday cut its benchmark rate by 25 basis points to 7.75 per cent, surprising the market with its timing as it signalled the start of the next cycle of lower interest rates, which will have a knock-on impact on business and overall sentiment, cheaper cost of borrowing for companies and consumers and help revive business over the next fiscal after two consecutive years of sub-5 per cent growth.

Both corporates and the government had been pitching aggressively for cutting interest rates, saying that the cost of capital was still high and was a major hurdle to reviving business. The decision to cut rates well ahead of the next policy review in early February may have stumped companies and bankers, but with inflation easing way below the RBI’s original projections of 6 per cent by the start of 2016, and with global oil prices sliding further, the RBI decided to go ahead with a rate cut.

The government’s commitment to stick to the fiscal deficit target of 4.1 per cent of GDP for 2014-15 was another factor which influenced this decision. The RBI had raised rates starting from July 2013 as inflation topped double digits before a pullback last year, paving the way for a cut now.

What will really boost sentiment is the signal that more rate cuts are in the offing — a cue which the markets picked up as stocks surged with the benchmark Sensex up by 728.73 points while the rupee rallied against the US dollar.

There are many who are now betting that the next rate cut could be as close as this year’s budget or shortly after that, depending on the fiscal consolidation plan which the finance minister is expected to unveil then. Analysts are expecting the interest rate to be cut by 75 basis points during the course of this year or perhaps next fiscal, provided there aren’t any major shocks — on the global or geo-political front.

RBI Governor Raghuram Rajan had said even after the last review in December that the central bank wanted to be certain that inflation expectations were dampened so that when it starts cutting rates, it would be a consistent trend for a good stretch of time, instead of being forced to back-pedal halfway. It helped that crude oil prices fell so sharply through this fiscal that the gain in terms of lower imports could be as high as $50 billion. The gain from this, which could feed into the broader economy, is expected to be 1-1.5 per cent of GDP, which should mean a higher economic growth in 2015-16. The RBI’s growth estimate for 2014-15 is 5.5 per cent.

Banks started cutting their lending rates, led by United Bank of India which lowered its base rate or minimum lending rate to 10 per cent. Deposit rates, which are now positive with consumer price inflation at 5 per cent in December, will moderate after continued…