1st LD Writethru: Indian central bank cuts interest rate by 25 points

The Reserve Bank of India (RBI) reduced the interest rate, or repo rate by 25 basis points on Thursday to stimulate the economy.

"The RBI had committed to initiate the process of monetary easing as soon as data indicated that medium term inflationary targets would be met," the bank Governor Raghuram. G. Rajan said in a statement:

Helped by plunging global oil prices, India's wholesale price index for December last year rose 0.11 percent year-on-year, after staying flat in November, according to data released on Wednesday.

Rajan said with this commitment in mind, it has been decided to reduce the policy repo rate (the rate at which RBI lends to commercial banks) under the liquidity adjustment facility (LAF) by 25 basis points from 8.0 percent to 7.75 percent with immediate effect.

The move, ahead of the RBI policy meeting on Feb. 3 and the government's annual budget statement at the end of next month, caught markets off guard.

"The cut was expected in first quarter, but has come sooner than expected and front run the February budget," said Radhika Rao, economist at DBS Bank Ltd.

"This demonstrates RBI's confidence in the evolving inflation outlook and it shows that they are putting faith in government's fiscal consolidation plan," Rao said. Endi