The Reserve Bank of India has cut the repurchase, or repo rate by 50 basis points to 6.75%, the lowest the key interest rate has been in four years. In a big boost for the markets and economy, RBI governor Raghuram Rajan today announced cut in repo rate by 50 basis points at the 4th Bi-monthly Monetary Policy statement for 2015-16. However, CRR (cash reserve ratio) remains unchanged at 4 per cent. The repo rate cut is more than what the experts were predicting.

However, the other cut is worrying. RBI has cut FY16 real GDP growth estimate to 7.4%. It expects growth to pick up towards the latter part of the fiscal.

The RBI has already eased the policy rate by 75 bps so far this year. The central bank will work with the government to remove impediments for banks (commercial banks) to pass on 125 bps rate cut to the consumers, said Rajan.

The RBI governor has been under pressure from the finance ministry as well as the industry to cut interest rate to spur economic recovery.

"Since our last review, the bulk of our conditions for further accommodation have been met. The January 2016 target of 6 per cent inflation is likely to be achieved. In the monetary policy statement of April 2015, the Reserve Bank said that it would strive to reach the mid-point of the inflation band by the end of fiscal 2017-18. Therefore, the focus should now shift to bringing inflation to around 5% by the end of fiscal 2016-17," the RBI said.

A rate cut is being seen as a key trigger to boost investment demand in an economy where credit growth has dipped to a multi-year low.

Expectations for a rate cut surged after the release of data showing consumer inflation at a record low of 3.66 per cent in August.

Inflation looks set to undershoot the government's projection of 6 per cent inflation by January 2016.

Indian industry is desperate for a pick-up in credit growth but has been hampered by a lack of monetary transmission of earlier cuts by banks, a point that Rajan has forcefully made to public sector banks. Bank, on their part, have turned cautious after a rising tide of stressed and non-performing assets, pushing back investment by domestic industry.

Rajan today said the inflation is expected to reach 5.8% in January 2016. It will stay below January 2016 target of 6% in FY16; will average 5.5% for FY17.

Concerns over inflation, though, remain. Rajan has made lowering inflation to sustenable levels a cornerstone of his governorship so far, and has largely succeeded in bringing down inflation levels to below the RBI’s own targets.

Retail inflation fell to a record low of 3.66% in August, and could well stay under Rajan’s self-imposed target of 6% by January 2016. However, the decline in prices has largely been driven by global factors such as a steep fall in oil and commodity prices.
 
But with a poor monsoon just over, the coming months could see prices jump again as the effects of a poor harvest kick in, wiping out the gains of a positive base effect of the past couple of months.
 
Additionally, the US Federal Reserve has hinted that a hiking of interest rates there is no longer an ‘if’ but a ‘when’. At a recent university address, US Fed chairperson Janet Yellen said the US central bank was on track to raise interest rates this year for the first time in nearly a decade. If that happens, it could see a sudden exit of foreign money from Indian markets, leading to turmoil on both equity and currency markets. This was acknowledged by the RBI today. "We pay attention to what Fed is doing," Rajan  said in the policy statement. Adding to global growth worries is the slowdown in China.

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