RBI cuts repo rate by 25 basis points to 7.5 per cent

Mar 4,  12:22 PM The Reserve Bank of India today cut repo rate by 25 basis points to 7.5 percent, signaling that it was convinced by the fiscal consolidation measures announced in the Budget. The RBI has kept the cash reserve ratio (CRR) unchanged at 4 percent. Reasoning behind the rate cut, the RBI said in its statement that disinflation is evolving along the path set out by the Reserve Bank in January 2014 and, in fact, at a faster pace than earlier envisaged. This is the second out of turn 25 basis point-cut after the one in January. The RBI also praised the fiscal consolidation measures announced in the Budget, despite the government extending its 3 percent fiscal deficit target by a year. The RBI also stated that 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. To this extent, the true quantum of fiscal consolidation may be higher than in the headline numbers. Also, the government is transferring a significantly larger amount to the states, without entirely devolving responsibility for funding central programmes. To the extent that state budget deficits narrow, the general fiscal deficit will be lower. Furthermore, 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.