Jaitely further said, “Rate cut will leave more money in the hands of people for greater spending and help in reviving investment cycle.”
Though resisting nudges from the government and demands from the industry for long, the Central bank decided to cut the benchmark lending rate or the repo rate a fortnight ahead of the scheduled monetary policy review on February 3rd, apparently on the back of a softening inflation.
The rate cut announcement was cheered by the stock markets with the BSE Sensex jumping over 600 points in morning trade. The NSE index too moved up 176 points to trade above the 8,400-mark.
"It has been decided to reduce the policy repo rate under the liquidity adjustment facility (LAF) by 25 basis points from 8.0 percent to 7.75 percent with immediate effect," the Reserve Bank said in a statement.
The RBI had reduced the repo rate last time in May, 2013 when it cut the rate from 7.5 percent to 7.25 percent. Ever since, the rates have been going up and remained at 8 percent since January 2014.
The rate follows decline in inflation as well as the commitment of the government to stick to the fiscal deficit target of 4.1 percent of the GDP in the current financial year.
"These developments have provided headroom for a shift in the monetary policy stance,” the RBI said.
Analysts believe that today's decision could pave the way for cutting retail lending rates that could see a reduction in the monthly payments on home, auto and other consumer loans.
Welcoming the RBI decision, SBI Chairperson Arundhati Bhattacharya said, “We thus believe that this cut may be just the beginning of a rate easing cycle", while Bank of Maharashtra Chairman S Munhot said many banks would now look at easing interest rates.
"We have already cut our base rate by 0.15 percent last month in anticipation of rate reduction by RBI. Now we would look at some select sectors like MSMEs to reduce our spread," he said.