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A surprise rate cut puts the Reserve Bank of India (RBI) firmly among the growing ranks of central banks that are scrambling to loosen monetary policy in an effort to shore up faltering economies and keep their currencies somewhat competitive.

India's central bank caught the markets napping Wednesday with its second rate reduction this year – lopping one-quarter of a percentage point off its key rate to 7.5 per cent. This followed a previous cut of the same size in mid-January. Both moves occurred outside scheduled policy reviews, sparking questions about the timing.

"This is odd for a central bank, which is not facing any … existential crisis in the economy to have two back-to-back inter-meeting rate cuts," Rajiv Malik, a senior economist with Hong Kong-based brokerage CLSA, told Indian broadcaster NDVD.

The Bank of Canada, which had similarly stunned markets with a cut in January, decided Wednesday to leave rates unchanged.

But close to 20 other central banks have shifted into easing mode, widening the policy gap with the U.S. Federal Reserve, which appears headed toward higher rates as early as June.

Faced with deflation and the European Central Bank's soon-to-be-unleashed quantitative easing, Poland's central bank slashed its key rate by half a percentage point to 1.5 per cent Wednesday, which was deeper than most economists had expected.

In India's case, the latest monetary loosening comes just four days after the Modi government unveiled a budget designed to bolster growth, putting off painful structural reforms and taking a year longer than previously targeted to get its messy fiscal house in better order.

But the government also agreed to RBI governor Raghuram Rajan's long-standing appeal to bolster the central bank's independence and to make price stability its primary job. It now will operate with a formal inflation target of 4 per cent, within a range of plus or minus two percentage points. Mr. Rajan has already aimed monetary policy at achieving this target by early 2018, at which point he has said that a real interest rate of 1.5 to 2 per cent would be the right call.

At the very least, it looks as if the hawkish monetary chief is giving the government what it seeks to get bank credit moving in exchange for an important victory for the bank. And with the inflation outlook improving, more cuts are likely as the year unfolds.

Consumer prices climbed 5.1 per cent annually in January, helped by falling oil prices. That's above the record low of 4.38 per cent last November but comfortably below the bank's target of 6 per cent by next January.

Mr. Rajan, a former University of Chicago finance professor, has focused much of his attention on corralling India's chronic inflation problem ever since his high-profile appointment to the central bank in 2013.

He was quoted just this week telling a group of students that the bank could not cut rates quickly because inflation remained high. He told analysts in a conference call that his remarks, made at a meeting closed to the media, were taken out of context. He was referring, he says, "not to our current inflationary path and our current monetary policy," but to India's inability to follow the Fed or the ECB in slashing rates to zero.

Mr. Rajan did not mention his fierce opposition to the Fed's rock-bottom rates and several rounds of quantitative easing from his previous perch at the University of Chicago. He urged then Fed chief Ben Bernanke to abandon the policy as early as 2010.

"It's quite clear that India is an outlier in terms of high interest rates relative to the world," India's deputy finance minister, Jayant Sinha, said after the rate decision. "We have a set of circumstances that will guide you to believe that there will be an easing on the monetary side."

There's nothing like political reality to get in the way of academic theory.