RBI Governor Raghuram Rajan said that with inflation under control, the bank felt it had room to act. HONG KONG (CNNMoney)
The central bank was not scheduled to issue a rate decision, and the move took economists and analysts by surprise.
The RBI reduced its key repo rate by 0.25 percentage points to 7.75%, the first such cut in nearly two years. The rupee surged on the news, as did stocks trading in Mumbai.
RBI governor Raghuram Rajan said in a statement that with inflation under control, the bank felt it had room to act.
"These developments have provided headroom for a shift in the monetary policy stance," he said.
Daniel Martin, an economist at Capital Economics, said that more rate cuts are likely. He expects additional central bank actions over the next year or so that will bring the repo rate down to 7%.
"We think today's surprise move marks the start of a loosening cycle," he said. "The economy could certainly use some support, with the industrial sector, in particular, clearly struggling to gain any momentum."
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India's economy has sputtered in recent quarters, despite efforts by the new government to build a consensus around economic reforms.
Prime Minister Narendra Modi has promised to end policy paralysis, reduce inflation and tackle corruption. He also pledged to establish manufacturing hubs and industrial corridors and improve the tax code.
India should get a nice boost from falling oil prices, as cheap gas will give consumers some extra resources in the short-term.
Related: Indian civil servant finally fired after epic 24-year absence
First Published: January 15, 2015: 12:01 AM ET
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