<div>In a big surprise for the markets, the Reserve Bank of India (RBI) cut its key repo rate by a bigger-than-expected 50 basis points to 6.75 per cent on Tuesday (29 September), with inflation running at record lows and the economy in danger of slowing down.<br><br>Home and corporate loans will cost less as the central lowered the key interest rate by 0.50 per cent — the biggest cut in over three years — to bolster the economy</div><div> </div><div>A <em>Reuters </em>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.</div><div> </div><div>The central bank has also cut the FY16 gross domestic product (GDP) growth target to 7.4 per cent from 7.6 per cent earlier.</div><div> </div><div>The equity market which was in the red till the announcement was back in the black.</div><div> </div><div>The market was widely expecting the RBI to go only for a token 25 basis points cut in view of the deficit monsoon and expectation that the US Fed will raise interest rates by December.</div><div> </div><div>It has kept the cash reserve ratio (CRR) of scheduled banks unchanged at 4.0 per cent of net demand and time liability (NDTL).</div><div> </div><div><div>The RBI justified the bigger reduction, saying consumer inflation was likely be running at 5.8 per cent, below the 6 per cent target for January, thanks partly to the government's efforts to contain food prices.</div><div> </div><div>The RBI also drew comfort from US Federal Reserve delaying the first hike in US interest rates in nearly a decade, according to a statement written by Governor Raghuram Rajan. Once US rates rise, analysts expect some emerging market currencies to come under pressure.</div><div> </div><div>"Monetary policy action has to be accommodative to the extent possible, given its inflation goals, while recognising that continuing policy implementation, structural reforms and corporate actions leading to higher productivity will be the primary impetus for sustainable growth" the RBI said.</div><div> </div><div>The benchmark 10-year bond fell 9 basis points to 7.64 per cent after the news. <br> </div><div>An interest rate cut had been widely expected after India reported consumer inflation had fallen to a record low of 3.66 per cent in August, and there have been calls from within government and industry for the RBI to lower borrowing costs.</div><div> </div><div>Still, it is unusual for the RBI to lower interest rates in September, as it has tended to be on the defensive against food price pressures during the monsoon season running from mid-June through September, after enduring several years of weak rains.</div><div> </div><div>Since adopting the repo rate as its main policy tool in 2004, the central bank had never cut rates during this period.</div><div> </div><div>This is also the biggest single monetary policy move taken by Rajan and it takes the repo to its lowest since March 2011. Since taking the helm of the central bank in September 2013, Rajan has raised the repo rate three times and lowered it three times, all by a magnitude of 25 bps.</div><div> </div><div>Calls for lower rates first began to grow louder after the release of data showing the economy grew by a slower-than-expected annualised rate of 7 per cent in the April-June quarter — faster than China, but well below the government's target of 8 to 8.5 per cent for the year ending in March.</div></div><div> </div><div><div>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.<br><br>(<em>Reuters also contributed to this story</em>)</div></div>
