India cuts key interest rate to 7.25%: NRI loans cheaper?

India's central bank cut interest rates for the third time this year on Tuesday in a bid to further spur Asia's third-largest economy, with inflation well below its target level.

The Reserve Bank of India (RBI) lowered the benchmark repo rate – the level at which it lends to commercial banks – by 25 basis points to 7.25 per cent with immediate effect.

RBI governor Raghuram Rajan said the cut was necessary to boost investment and called for banks to pass on the lower borrowing costs to customers.

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

If private banks do follow through by reducing the interest rate they charge their customers, it could lower the monthly outgo of some Non-Resident Indians (NRIs) who may be repaying a mortgage back home. In addition, it may also lower the cost of fresh borrowings by customers in India and NRIs.

The cut was in line with analysts' expectations and marked the RBI's third cut in five months, raising the amount the bank has sliced off the key rate in 2015 to 75 basis points.

The RBI announced its first easing in 20 months in January, snipping 25 basis points off the repo rate.

It then made a surprise repeat cut in March before keeping the rate unchanged in April, citing inflation concerns and a failure of most commercial banks to implement reduced loan rates.

"Banks should pass through the sequence of rate cuts into lending rates," Rajan reiterated on Tuesday.

The governor has made controlling inflation a priority, setting a target of bringing it consistently below six percent by January next year and to four percent for the 2016/17 financial year.

In April, consumer inflation fell to a four-month low of 4.87 per cent, well within the RBI's target range.

With the monsoon due to start imminently, and forecast to be weaker than usual, the RBI took the unusual step of urging the government to ensure there were adequate food supplies to keep prices under check.

"Strong food policy and management will be important to help keep inflation and inflationary expectations contained over the near term," the RBI said its statement following the monetary policy review meeting in Mumbai.

Prime Minister Narendra Modi's right-wing government swept to power last year pledging to reform and revive a flagging economy, and has been keen for the RBI to lower interest rates.

It received a major boost on Friday when data showed that India's economy grew 7.5 per cent in the first three months of the year, overtaking China.

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