The Indian rupee spiked up against the USA dollar in afternoon deals on Wednesday, after the Reserve Bank of India slashed key interest rates by 25 basis points, given falling inflation, smooth roll-out of the Goods and Services Tax and a normal monsoon.
The rupee also gave up earlier gains to trade at around 63.80 per dollar, close to its levels before the RBI statement.
The RBI has cut repo rate under the liquidity adjustment facility (LAF) by 25 basis points from 6.25% to 6.0% with immediate effect.
On Tuesday, the domestic unit had closed at 64.07 per dollar against the greenback.
The announcement by the Reserve Bank of India reduced to 6 percent its repo rate, the interest rate the central bank charges on lending to commercial banks. The dollar index has depreciated by over 9 percent since the beginning of the year.
The RBI stuck to its inflation projections, including that price increases could accelerate to 3.5 percent to 4.5 percent in October-December.
Anand James, chief market strategist, Geojit Financial Services Ltd: "Given the soft PMI numbers and concerns over goods and service tax (GST) hassles, markets have been expecting a deeper cut, especially as inflation expectations had eased".
"We look at the policy rate cut as a knee-jerk reaction to the current growth-inflation dynamics". While most economists expected the cut, not all thought it would be useful.
"Economic growth has come down substantially, and from that perspective, further stimulus is required for the economy in terms of reduction in the interest rate".
Jimeet Modi, CEO, Samco Securities: "The rate cut of 0.25% by MPC of RBI was disappointing".
Four members of the committee voted to cut rates by 25 bps, while one voted for a 50 bps cut and one voted to leave rates unchanged.
The RBI's decision to lower key lending rates and healthy inflows of foreign funds in capital markets pushed the Indian rupee to close at a new two-year high level of Rs 63.70 to a United States dollar on Wednesday.