Reserve Bank of India (RBI) governor Raghuram Rajan on Wednesday brought down policy repo rate by 25 basis points to 7.5 percent, delivering its second cut this year on the back of easing inflation and a government commitment to fiscal discipline. The RBI has kept the cash reserve ratio (CRR) unchanged at 4 percent. This is the second out of turn 25 basis-point cut after the one in January.

RBI had introduced its own targets a year ago and the cut comes just days after the government and the central bank agreed to formally adopt inflation targeting, reports Reuters.

The marginal standing facility (MSF) rate and the bank rate has been adjusted to 8.5 percent with immediate effect. The reverse repo rate under the liquidity adjustment facility stands adjusted to 6.5 percent.

RBI Surprises again, cuts repo rate by 25 bps to 7.5%

“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,” Rajan said in a statement on Wednesday.

“It has been decided to reduce the policy repo rate under the liquidity adjustment facility by 25 basis points from 7.75% to 7.5% with immediate effect,” the statement said.

Indian inflation has moderated sharply as oil prices slumped since last year. In January, consumer prices rose an annual 5.11 percent, well within the inflation target agreed by the Government and RBI.

Immediately after the announcement, markets welcomed the move, with the BSE Sensex jumping over 430 points to cross the 30,000 mark for the first time ever. The rupee strengthened by 27 paise to trade at 61.65 against the dollar in early trade today at the Interbank Foreign Exchange.

The RBI had first lowered interest rates this year on Jan. 15, in a similarly unexpected move. Both rate cuts took place outside of the central bank’s scheduled policy review meetings.

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