The six-member Monetary Policy Committee (MPC) of the Reserve Bank of India (RBI) chose to reduce the key policy rate or the repo rate by 25 bps to 6.25% in the last bimonthly policy review of 2018-19 while changing the policy stance to "neutral" from "calibrated tightening".
"The RBI's new governor Shaktikanta Das has delivered what the Modi government was hoping for", Mark Williams, chief Asia economist at Capital Economics wrote in a research note. Deputy Governor Viral Acharya and another MPC member, Chetan Ghate, voted for status quo in interest rates, while Shaktikanta Das and three others voted for a cut in interest rates.
The RBI policy is a very dovish one and signals further rate cuts.
A former economic affairs secretary, who now has the charge of central bank and is perceived to be close to the Union government, will not take "no" from banks on rate cuts too quickly.
Amid expectations that the panel will soften its view on inflation risks in the economy, the committee cut repo rate by 25 basis points to 6.25 percent. A decision on the specifics of the umbrella organisation proposal will be taken shortly.
Indian shares pared gains while ten-year bond yields slid five basis points after the surprise rate cut. The rupee weakened to 71.69 to the dollar immediately after the announcement but did strengthen to 71.42 soon. The 25 bps rate cut has come after a period of one-and-a-half years (the last one was in August 2017).
The repo rate is the rate at which the Reserve Bank lends short-term money to the banks, while the reserve repo rate is the rate at which the central bank borrows money from commercial banks.
The BJP led national alliance is already in poll mode and announced several sops at its interim budget on February 1.
The shift in monetary policy comes nearly a week after Modi's government unveiled a budget packed with measures sure to please many voters, including fresh tax breaks for middle-class families and payments to India's struggling small farmers.