The Reserve Bank of India (RBI) on Thursday surprised markets by cutting interest rates, in a bid to spur growth in Asia's third-largest economy and on the back of evidence that inflation has slowed.
The central bank cut its key repo rate by 25 basis points to 7.75 percent, its first cut since March 2013. The RBI was not scheduled to meet on monetary policy until February 3.
The move comes a day after government data showed wholesale price inflation in December rising 0.11 percent from the year-ago period, much lower than the 0.6 percent rise forecast by economists, as oil prices plunged and food costs stabilized.
In a statement, the RBI cited lower-than-expected inflation, weak crude prices and weak demand as the reasons for its move, as well as the government's commitment to sticking to a fiscal deficit target. "These developments have provided headroom for a shift in the monetary policy stance," it said.
Markets reacted with euphoria on the news: the rupee strengthened to as much as 61.70 against the U.S. dollar, from a close of 62.09 on Wednesday. The benchmark stock index Sensex jumped 2 percent in the early going.