India's central bank cut its key interest rate by half a percentage higher than expected Tuesday, the first cut in three years as it tries to shore up flagging growth, even as inflation remains high.
The Reserve Bank of India cut its short-term rate on loans - the interest rate - to 8.0 percent from 8.5 percent. Many economists had expected a cut of a quarter point.
The bank said it decided to reduce the rate because economic growth has slowed below what it believes is its rate of long-term trend, which in turn is contributing to a moderation in core inflation.
The cut in interest rates last time was in April 2009. Between March 2010 and October 2011, the bank fought a lonely battle against inflation, raising interest rates by 3.75 points in 13 consecutive rate hikes.
The central bank warned that the scope for further rate cuts is limited, partly because growth is not slowing down dramatically. "At the same time, upside risks to inflation remain. These considerations inherently limit the scope for reduction in policy rates."
The move comes amid the latent tension between the central bank of India, New Delhi, who could not - or not - to contain public spending and implement policy changes that could unlock the supply bottlenecks and boost growth.
The RBI New Delhi rebuked for "fiscal imbalance", and again warned that unless the government takes measures to contain expenditure subsidy, which has fueled demand and worsened the budget deficit, it would be difficult for the bank to cut rates further more.
The bank warned New Delhi to raise subsidized fuel prices, despite the inflationary impact of this measure.
Economic growth in India fell to 6.1 percent during the December quarter, the lowest in more than two years.
The RBI predicted that India's economy grew 7.0 percent for the fiscal year ending March 2012 and expects growth to rebound to 7.3 percent in the fiscal year.
He said inflation, which was 6.9 percent in March, would slow to 6.5 percent by next March.
Benchmark of India Sensex stock index rose 0.6 percent after the rate cut was announced.
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Mika: there is always pressure
11 years ago
