The Reserve Bank Governor D Subbarao today said the central bank decided to cut rates by 0.50 percentage points, which took everyone by surprise, as it wanted banks to swiftly pass the benefits to borrowers.
The sharper cut, which was aided by a fall in headline inflation, was also aimed at boosting growth, he added.
"One of the considerations certainly was that the transmission should be more effective...A 50 bps cut should be more effective than a smaller cut," Subbarao, criticised earlier by many for his "baby-steps in hiking lending rates", told reporters at the post-policy news conference.
In the annual monetary policy announced today, the RBI surprised everybody with a 0.50 percentage points or 50 bps reduction in the lending rates to 8%.
The central bank had contemplated various options like a standalone 0.25% cut, a 0.25% cut along with a reduction in the cash reserve ratio, among others before zeroing in on this option, he said.
The Governor said the cumulative impact of today's action along with the twin cuts in the CRR in January (50 bps) and March (75 bps) -- which have not resulted in any rate cuts from banks so far -- will ensure that the RBI's objective of a swifter transmission is achieved.
"The bankers are very sanguine about transmission, both on the deposit and the lending rates," he said.
The bankers have also said that a drop in both lending and deposit rates is imminent after today's RBI action.
Subbarao also underlined the need for decontrol in diesel prices, saying that at worst, such a move will push up the headline inflation number by 2 percentage points.
"There will be some relative price adjustment if petroleum prices are adjusted. But whether monetary policy should respond to that, will depend on how that transmits, if at all, to generalised inflation," he said.
When asked about the cautious stance on any further rate cuts expressed in the document, Subbarao avoided a direct answer, saying "if the growth-inflation dynamics change in either direction that will change our policy stance. I cannot say how we will behave, how we will respond to each movement in growth and inflation.
As to what brought about the drastic change in the stance from cautious in mid-March to a sharp reduction today, Subbarao hinted that lower inflation figures for March and the sharper fall in industrial production numbers were among the factors which led to the change in stance.
