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RBI Surprises Market, Cuts Repo Rate by 50 bps

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RBI Governor Raghuram Rajan took the market by surprise by announcing to reduce repo rate by 50 basis points to 6.75 per cent from 7.25 per cent earlier. Earlier, a Reuters poll last week showed only one out of 51 economists had expected a 50 basis points rate cut, while 45 had expected a 25 bps cut. It had kept its benchmark lending rate viz. the repo rate unchanged at 7.25 per cent in its August 4 monetary policy review.

"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 per cent by the end of fiscal 2016-17," RBI said.

"While the Reserve Bank's stance will continue to be accommodative, the focus of monetary action for the near term will shift to working with the Government to ensure that impediments to banks passing on the bulk of the cumulative 125 basis points cut in the policy rate are removed. The Reserve Bank will continue to be vigilant for signs that monetary policy adjustments are needed to keep the economy on the target disinflationary path," RBI explained.

"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 per cent by the end of fiscal 2016-17," RBI said.
 

This time majority of participants were hoping for 25 basis points cut in key lending rate on the back of cooling inflation and status quo by US Fed, which has given room for the RBI to cut short-term lending (repo) rate in its fourth bi-monthly monetary policy review on Tuesday.

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