The Reserve Bank of India (RBI) Policy Announcement

The Reserve Bank of India (RBI) cut interest rates for a third time this year on Tuesday, taking advantage of subdued inflation to give more support to an economy that many economists doubt is doing as well as latest impressive growth numbers suggest.

The RBI's quarter point reduction in the repo rate to 7.25 per cent was predicted by 35 of 48 analysts polled by Reuters. Previous cuts, in January and March, had also been by 25 basis points.

Home, auto and corporate loans are likely to cost less after RBI on Tuesday cut interest rate by 0.25 per cent for the third time this year to spur investment and growth but hinted there may not be any more cuts in the near-term sending stock markets into a tizzy.

The governor asked banks to follow suit and pass on the rate cuts -- 0.75 per cent since January to individual and corporate borrowers.

Most bankers felt that with today's rate cut RBI has provided space for lowering lending and deposit rates. Public sector Allahabad Bank became the first to reduce the lending rate by 0.3 per cent.

RBI cut the repo rate (short-term lending rate) from 7.5 per cent to 7.25, but left all other policy tools like cash reserve requirement unchanged at 4 per cent and Statutory Liquidity Ratio (SLR) at 21.5 per cent.

Rajan lowered projections of the economic growth as measured by GVA (gross value added) to 7.6 per cent from 7.8 per cent estimated in April due to global factors and likely impact of below normal monsoon.

At the same time, inflation still remains a worry for the central bank as it expects price rise to remain subdued till August before rising to 6 per cent by January 2016.

The other concern for the RBI is raising crude oil prices. Since the last policy in April, the crude oil prices have witnessed an increase of 9 per cent. Soon after the policy announcement, the BSE Sensex plunged by over 400 points. The markets, however, later recovered slightly.

The reduction showed policymakers recognized the need to put the economy on a sounder footing, regardless of data released on Friday that showed India outpaced China by growing 7.5 per cent in the March quarter.

Many economists, inside and outside the government, suspect a new way used to calculate gross domestic product has overstated how fast India is rising.

With low domestic capacity utilization, still mixed indicators of recovery, and subdued investment and credit growth, there is a case for a cut in the policy rate today the RBI said in a statement.

Still, the RBI did not take any new steps to free up cash-strapped commercial banks liquidity, which bankers had said were needed for them to lower lending rates further and pass on the benefits of monetary easing to the broader economy. Instead, the central bank urged lenders to lower their lending rates.

The RBI also warned it would closely track inflationary trends, citing risks posed to food prices if monsoon rains are weaker than expected, or global crude prices recover, or the rupee weakens due to volatility in global markets.

And RBI said that a more appropriate stance is to front-load a rate cut today and then wait for data that clarify uncertainty. Meanwhile banks should pass through the sequence of rate cuts into lending rates.

RBI Governor Raghuram Rajan said that monetary policy would continue to be data contingent, warning that a below normal monsoon, global crude prices and external sector risks pose a threat to inflation. The central bank projects inflation at around 6 percent by January 2016.

Today's decision by the Reserve Bank of India (RBI) to cut the repo rate for the third time this year is unlikely to be the last in the current loosening cycle.

Rajan reiterated that the government should avoid putting the burden on the central bank to revive the economy, which he believes is in a "slow recovery".

Gross domestic product (GDP) data out last week showed India's economy expanding 7.5 percent in the January-March period from the year-ago period.

However, nagging concerns remain over the government's new way of calculating its growth data and how the robust growth figures belie broad economic weaknesses.

The 3rd bi-monthly policy statement will be announced on August 4, 2015.