By cutting the repo rate, the RBI has shown faith in the fiscal consolidation measures outlined by Finance Minister Arun Jaitley in the Union Budget on Saturday
The RBI Wednesday surprised market with a 25 basis point cut in repo rate to 7.5 percent from 7.75 percent. By doing so, it has shown faith in the fiscal consolidation measures outlined by Finance Minister Arun Jaitley in the Union Budget on Saturday.
Including the 25 basis point cut in repo rate in January, the RBI has now cut rates by 50 basis in 2015.
Seven reasons why the RBI chose to cut repo rate ahead of the credit policy on April 7:
(Excerpts from the RBI statement)
* January inflation at 5.1 per cent was well within the target of 8 per cent for January 2015. Vegetable prices declined and inflation excluding food and fuel moderated.
* There are many important and valuable structural reforms embedded in this Budget, which will help improve supply over the medium term
* The government has emphasized its desire to clean up legacy issues which gave a misleading picture of the true extent of fiscal rectitude, and has
also moderated the optimism in its projections.
* Government is transferring a significantly larger amount to the states. To the extent that state budget deficits narrow, the general fiscal deficit will be lower
* Supported by lower international energy prices, there is a welcome intent to shift from spending on subsidies to spending on infrastructure, and to better target and further reduce subsidies through direct transfers
* Government has signed a inflation targeting memorandum with RBI. This makes explicit that government and RBI have common objectives and that fiscal and monetary policy will work in a complementary way
* The rupee has remained strong relative to peer countries
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