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Reserve Bank of India Governor Raghuram Rajan. (Wikimedia Commons | IMF)

Shedding his hawkish stance, Reserve Bank of India Governor Raghuram Rajan sprang a surprise, Jan. 15, by cutting interest rates by 25 basis point a move that is likely to result in cheaper home and auto loans. A Press Trust of India report.

Reacting to the development, the BSE Sensex soared by over 650 points while NSE Nifty rose by over 194 points in the afternoon trade.

The rate cut ahead of a scheduled RBI policy meeting on February 3 will result in “more money in the hand of the consumers,” Finance Minister Arun Jaitley said, while bankers said it was a “movement in direction of interest rate cut.”

Rajan, who had focused on quelling inflation since taking office in September 2013, lowered the benchmark repurchase rate to 7.75 percent from 8 percent, the first reduction since May 2013.

As a result the reverse repo rate, the rate at which the central bank drains excess liquidity from the banking system, also moved down by 25 basis points to 6.75 percent.

Consumer-price inflation will probably be below the RBI’s target of 6 percent by January 2016, Rajan said.

“Reduction in the rates is a positive development. It will lead to more money in the hand of the consumers and greater spending. It’s positive for the Indian economy,” Jaitley said. “It will certainly help in reviving investment cycle that the government is trying to restore,” he said.

While SBI Chairman Arundhati Bhattacharya said the country’s largest lender “will look at how and when base (lending) rates can be cut,” ICICI Managing Director and CEO Chanda Kochhar said it was “movement in the direction of interest rate cut.”

RBI rate follows decline in inflation as well as the commitment of the government to stick to the fiscal deficit target of 4.1 percent of the GDP in the current financial year.

Rajan had during the previous monetary policy review on December 2 hinted at a possible easing in rates early in 2015, including outside of planned meetings.