In a surprise move Reserve Bank Governor Raghuram Rajan on Tuesday, Sep 29 announced to cut repo rate by 50 basis points to 6.75 per cent.

The governor said many conditions laid down by the RBI in the previous policy announcement in August have been met, paving way for a sharper rate cut.

The rate cut will help boost domestic demand at a time when the industry is still struggling with overcapacity and weak corporate investment. It will allow commercial banks to lower their own lending rates for personal, automobile, housing and commercial loans, translating into lower EMIs. The RBI also signaled that it will be “accommodative” in its stance despite the sharp 50 basis points repo rate cut today.

Domestic retail inflation sank to a record low of 3.66 per cent in August, much below the central bank’s projection of 6 per cent inflation by January 2016.

Dr Rajan also attributed the deterioration seen in external environment for the sharper-than-expected reduction in repo rate.

“There has been a dramatic reduction in external environment including news on China, which had tremendous impact on commodity prices around the world… In general sense, global activity will be further downgraded from August,” Dr Rajan said.

Earlier, a Reuters poll last week showed only one out of 51 economists had expected a 50 basis points rate cut, while 45 had expected a 25 bps cut.

Here are the highlights from RBI monetary policy review

–RBI cuts policy rate by 50 basis points to 4-year low  from 7.25 per cent of 6.75 per cent.
-RBI keeps CRR unchanged at 4 per cent.
-GDP growth estimate to 7.4%; expects pick up towards the latter part of the fiscal
-Inflation to stay below January 2016 target of 6% in FY16; will average 5.5% for FY17
– RBI says inflation is expected to reach 5.8% in January 2016
– RBI to issue final guidelines on base rate computation by November-end
-Limit for FPI investment in govt bonds to be increased in phases to 5% of outstanding stock by March 2018
– continue to provide liquidity under overnight repos at 0.25 per cent of bank-wise net demand and time liability (NDTL) at the LAF repo rate and liquidity under 14-day term repos as well as longer term repos of up to 0.75 per cent of NDTL of the banking system through auctions; and
– continue with daily variable rate repos and reverse repos to smooth liquidity
– Limits for FPI investment in debt securities will be henceforth announced or fixed in rupee terms
– RBI to issue final guidelines on base rate computation by November-end
-Fifth Bi-monthly Monetary Policy on December 1

The rate cut will help boost domestic demand at a time when the industry is still struggling with overcapacity and weak corporate investment. The RBI also signaled that it will be “accommodative” in its stance despite the sharp 50 basis points repo rate cut today.