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India lowers rates in second unscheduled cut this year

The Reserve Bank of India surprised markets on Wednesday by cutting rates for the second time this year, sending stocks to a record high.

The central bank lowered its benchmark repo rate by 25 basis points to 7.5 percent, it said in a statement, on the back of easing inflation and the government's commitment to fiscal discipline.

The previous cut, which was also unscheduled, took place mid-January when the central bank shaved rates by a quarter point.

The Nifty index soared to a record 9,008 at the open on the news, while the BSE sensex jumped to a two-month high. The Indian rupee also rose against the U.S. dollar, strengthening to 61.65 versus 61.91 before the announcement.

Indranil Mukherjee | AFP | Getty Images

The new normal

"I think to some extent the off-cycle moves are becoming the 'new normal'. It looks like the rate cut is an endorsement of the RBI's belief in the government's 'long haul' budget," Vishnu Varathan, senior economist at Mizuho Bank, told CNBC.

The government on Saturday pledged to be fiscally responsible but said it would take an additional year to meet a fiscal deficit target of 3 percent of gross domestic product.

"[RBI] governor Rajan likely subscribes to the fact that the government's increased focus on infrastructure spending will be positive for economic growth, which will ultimately help its fiscal position," Varathan added.

According to Radhika Rao, economist at DBS, the rate cut may have also been aimed at weakening the rupee, which has appreciated 2 percent against the greenback this year.

"At the margin, the move to lower rates could also carry an underlying intent to keep the currency on a weaker footing relative to trading partners and disincentivise strong capital inflows," she said.

Easing cycle picking up

Analysts say the move signals the easing cycle is just gaining momentum.

"The monetary loosening cycle still has some way to run," Daniel Martin, senior Asia economist at Capital Economics, wrote in a note. "We continue to expect another 50 basis of cuts in both the repo and reverse rates by the end of the year, to 7 percent and 6 percent, respectively."

While the latest move has tempered Mizuho's forecast for a cut in April, given subdued inflation, Varathan still expects rates to fall to sub-7 percent by the end of next fiscal year.

Some 20 central banks have eased monetary policy s so far this year, mostly to stem easing inflation caused by a collapse in oil prices. Just over the weekend, China cut rates in its third aggressive loosening action since last November.