Mumbai, Jan. 15: Home loan seekers and investors in stock markets had reason to whoop with joy after Reserve Bank of India governor Raghuram Rajan surprised the Street once again by trimming the policy interest rate by 25 basis points to 7.75 per cent.

Rajan, who has raised the repo rate three times since he assumed office in September 2013, announced his first rate cut on Thursday amid intense pressure from the Narendra Modi government and rising clamour from industry for monetary policy action to revive a faltering economy.

The Sensex leapt 728.73 points, or 2.6 per cent, to 28,075.55, which sent aggregate investor wealth surging past Rs 100 lakh crore.

The unexpected early morning announcement - more than two weeks before the next monetary policy review on February 3 - also held out the promise of a harvest of gains for borrowers and consumers on the day that is celebrated as Makar Sankranti in the North and Pongal in the South.

The rate cut came amid signs of cooling inflation and a perception of strong government commitment to cap fiscal deficit at 4.1 per cent this fiscal.

The RBI governor said further rate cuts would depend on 'data that confirm continuing disinflationary pressures'.

He said inflation was likely to be below 6 per cent in January, far below the RBI's target of 8 per cent.

Rajan also put the ball in the Centre's court once again by saying that further easing would also depend on the government's efforts to achieve fiscal consolidation and the pace of reforms in areas like power, land, minerals and infrastructure.

The government has passed a slew of ordinances in recent weeks to break the legislative logjam that has been holding up reforms in these key sectors, which, Rajan believes, hold the key to an economic resurgence.

Finance minister Arun Jaitley had piled the pressure on the RBI to abandon its hawkish stand by suggesting that the time was right to cut interest rates.

Although retail inflation has eased since September and currently hovers at 5 per cent, Rajan had been squeamish about cutting the policy rate because of the RBI's forecast of a bounce back to 6 per cent sometime in March.

That is why the suddenness of the rate cut has sparked a niggling suspicion that Rajan buckled under pressure from the government to trim rates - a view that was reinforced when Jayant Sinha, minister of state for finance, said the credit for the rate cut should go to the political leadership.

'I think the credit (for the rate cut) should go to the political leadership, to our honourable Prime Minister and finance minister,' Sinha said.

On January 3, Modi, Jaitley and top finance ministry officials had met Rajan and top executives of state-owned banks at a conclave in Pune to which the media was given very restricted access.

'This is a surprise move in the middle of the war on inflation,' said N.R. Bhanumurthy, a well-known economist with the National Institute of Public Finance and Policy.

'It goes against the RBI governor's philosophy that monetary policy should be predictable. It shows the governor is very pragmatic and can look at his own position and can change,' he added.

Investors saw RBI governor Raghuram Rajan putting India on a new easing cycle, as the former International Monetary Fund chief economist ordered his first rate cut since being appointed in August 2013.

'This demonstrates RBI's confidence in the evolving inflation outlook and it shows that they are putting faith in government's fiscal consolidation plan,' said Radhika Rao, economist at DBS Bank Ltd.

The decision, hatched between Rajan and senior policymakers over recent weeks, could ease the relationship between Jaitley and Rajan, who was hired by the last, Congress-led government.

Jaitley, clearly delighted, said the rate cut would put more money in the hands of consumers and help revive investment.

'If there is a deal between Rajan and Jaitley, that's very very positive,' said said Surjit Bhalla, chairman of emerging markets advisory firm Oxus Investments and a leading commentator based in New Delhi. 'Monetary and fiscal policy should be coordinated.'

Banks respond

Banks have already started to react to the cut in the policy rate with the Calcutta-based United Bank of India cutting its base rate by a quarter of a percentage point to 10 per cent. A couple of hours later, Union Bank followed suit.

There are strong indications that front-ranking banks like State Bank of India and ICICI bank and mortgage financier HDFC will also trim their lending rates.

CII director-general Chandrajit Banerjee said the reduction in repo rate has come as a positive surprise in the new year and would lift the mood of investors who have been grappling with subdued demand conditions.

But not everyone was gung-ho over the latest rate cut.

However, P. Balendran, vice-president of General Motors India, said they were expecting a cut of at least 50 basis points.

'This reduction seems to be too little, too late as the industry had already been facing a long and protracted slowdown over the past two years. Moreover, we were expecting a reduction of at least 50 basis points to ensure some uptick in consumer sentiment.'

For Modi, relief for the economy cannot come soon enough, with some global CEOs venting frustration at a recent investment summit that, eight months into his rule, doing business in India is as hard as it ever was.

There is mounting evidence too that rural India is struggling as Modi curbs aid schemes championed by the last government, compounding the impact of last year's bad monsoon and a slide in prices for farm exports.

With reuters inputs