India has cut interest rates

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The Reserve Bank of India cut its benchmark interest rate earlier today, reducing its repo rate by 25 basis points to 6.5%.

The move, widely expected by financial markets, was the first reduction in rates since September 2015 and left the key lending rate at levels not seen since January 2011.

In the monetary policy statement that accompanied the decision, the bank suggested that “monetary policy will remain accommodative”.

“The Reserve Bank will continue to watch macroeconomic and financial developments in the months ahead with a view to responding with further policy action as space opens up,” it acknowledged.

On the outlook for inflation, it noted that CPI is “expected to decelerate modestly and remain around 5% during 2016-17 with small inter-quarter variations”.

Though the reduction to lending rates was widely expected, the RBI surprised by lifting its reverse repo rate — or the rate lenders charge to the bank — by 25 basis points to 6.0%.

“The moves attempt to a fine balancing act: injecting enough liquidity, while ensuring banks have enough incentives to place surplus cash with the RBI to prevent cash from flooding the system,” said Reuters following the decision.

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