"Change of stance to neutral is positive as it means we can look forward to future rate cuts". Most polled respondents expected the central bank to only change the stance, to neutral.
The cut is welcome news for Prime Minister Narendra Modi's government, which wants to boost lending and lift growth as it faces elections by May. MPC members Viral Acharya and Chetan Ghate voted against a rate cut.
There have been signs that Modi's support has crumbled in parts of a countryside that supported his Hindu nationalist Bharatiya Janata Party (BJP) in the last election in 2014. In its budget on February 1, the government doled out cash to farmers and tax cuts to middle-class families, at the cost of a wider fiscal deficit and larger borrowing. The repo rate at which banks borrow from the central bank now stands at 6.25 per cent from 6.5 per cent.
"The rate cut is unlikely to give a major fillip to investments as capacity utilisation still remains low in the manufacturing sector", said Devendra Kumar Pant, chief economist, India Ratings & Research, the arm of rating agency Fitch. The Federal Reserve has changed direction, and now many analysts expect no U.S. rate hikes this year, after four in 2018.
The RBI concluded that India needs some higher monetary policy intervention, and reduced the benchmark policy rate by 25 basis points (bps) on Thursday. The Indian rupee weakened to 71.69 to the dollar immediately after the decision was announced, but it later strengthened to 71.45.
This was the first meeting of the monetary policy committee (MPC) under Shaktikanta Das who took over as the RBI governor in December after the sudden exit of Urjit Patel over differences with the Modi government.
The interest rate cut coupled with the budget sops would provide much needed respite to the borrowers irrespective of whether it is a auto loan, personal loan or home loan.
India's retail inflation fell to a 18-month low of 2.19 per cent in December.
It can be noted that the RBI had hiked rates twice in quick succession in 2018 but has been cutting its inflation projections ever since, leading to the rate cut Thursday-the first since the middle of 2017.
The MPC also trimmed its economic growth forecast to 7.2-7.4% during April-September from its previous 7.5% estimate.
RBI Governor Shaktikanta Das cut the interest rate by 0.25 percent to 6.25 percent, a move that will lead to reduction of lending rate by banks leading to lower EMI for housing, vehicle loan and corporate borrowers. "The macro backdrop as such supports the RBI's stance", said Mendiratta.