India makes surprise interest rate cut to 7.5%

India's central bank cut interest rates by 25 basis points on Wednesday in a surprise announcement, days after the new right-wing government's first full-year budget.

The Reserve Bank of India (RBI) said the benchmark repo rate -- the level at which it lends to commercial banks -- would fall to 7.5 percent as it forecast a slowdown in inflation in the coming financial year.

"Softer readings on inflation are expected to come in through the first half of 2015-16 before firming up to below six percent in the second half," RBI governor Raghuram Rajan said in a statement.

"Consequently, it has been decided to reduce the policy repo rate under the liquidity adjustment facility (LAF) by 25 basis points from 7.75 per cent to 7.5 percent with immediate effect."

Rajan has made controlling inflation a priority since taking the helm of the RBI, often resisting previous calls to reduce interest rates.

But a fall in the global oil prices has led to an easing in inflation in recent months, with wholesale inflation registering a 0.39 percent fall in January, a second drop in three months.

As part of an agreement between the government and RBI, which was signed last month but only made public earlier this week, the central bank has a specific target of bringing inflation consistently below six percent by January next year, and to four percent for the 2016/17 financial year.

Finance Minister Arun Jaitley announced an $11.3-billion increase in spending on roads, rail and other infrastructure when he unveiled the budget on Saturday, which also included plans to cut the corporate tax rate.

An official report released on the eve of the budget said India's economy is in a "sweet spot" and ready to grow by more than eight percent in the next financial year.