NEW DELHI, Junr 06:India’s central bank has cut its key interest rate by a quarter of a percentage point to 5.75 per cent from 6 per cent with immediate effect to fortify the economy as consumer spending and corporate investment falter, report agencies.
The interest rate is what the Reserve Bank of India charges on lending to commercial banks.
In a bimonthly review of the economy released on Thursday, it also decided to change the stance of monetary policy from neutral to accommodative
The central bank noted that inflation remains below its target, even after earlier rate cuts. It also expressed concern over a sharp slowdown in consumer demand and investment.
Lower interest rates help make credit cheaper for borrowers, though they can also spur inflation.
The bank attributed its decision to the growth plunge, citing a drop in private sector demand and exports.
"However, the overall slowdown in growth was cushioned by a large increase in [government spending]," it added.
The cut takes India's key interest rate to its lowest level in nearly a decade and should provide a boost for Prime Minister Narendra Modi as his second term in office begins following a landslide election win.
Modi secured a bigger majority than expected even as growth slumped to 5.8% in the quarter ended March, the weakest rate of expansion in two years. The economy grew by 6.6% in the previous quarter.
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