The Reserve Bank of India cut the repo rate -- the rate at which the central bank lends to commercial banks -- by 50 basis points to 8 per cent. The more-than-expected reduction was widely welcomed by business.
After having increased interest rates 13 times since March 2010, the RBI's move reflects a shift in the bank's policy from focusing exclusively on reining in inflation -- which at 6.89 per cent remains high -- to reviving the country's slowing economy, which has been choked by its aggressive monetary tightening strategy.
"The rate cut shows that the attention has now shifted towards stimulating growth, there is no doubt about that," said A Prasanna, an economist at ICICI securities.
"The RBI was worried about inflation but from the latest data we can see that it has come down and is somewhat under control. Now that inflation's trajectory is downward the RBI is more confident to cut rates," he added.
The decision announced by Duvvuri Subbarao, India's central bank governor, comes after China, Brazil and Indonesia moved to ease liquidity, as emerging economies try to shield themselves from the European debt crisis.
Growth in the last quarter of 2011 was the slowest in nearly three years, rising 6.1 per cent in the three months to December 31, compared to above 8 per cent a year earlier. Meanwhile, inflation has eased persistently over the last year. The wholesale price index rose 6.89 per cent in March -- below 7 per cent for the third consecutive time.
Indian companies welcomed the move. Industrialists had been begging the central bank to cut rates over the last two years, as they blamed the RBI's aggressive monetary tightening policy for stalling investment and damaging overall growth.
Rajiv Kumar, director of the Federation of India Chamber of Commerce and Industry, said that the move would be overwhelming welcomed by business.
"We called for a bold move and finally we got a bold rate cut," said Mr Kumar.
However, he cautioned that a 50 basis point rate cut would not be enough to put the Indian economy back on strong growth track. He said that the government had to push through structural reforms to ease investment.
"The RBI has done its part now the government needs to do its part," said Mr Kumar. "Unfortunately they [the government] don't inspire much confidence at the moment."
Economists warn that there will not be a wave of rate cuts in the following months, especially as inflation will remain a key concern for the central bank over the next three quarters.
