RBI Policy: MPC Cuts Repo Rate by 25 Basis Points to 6.25%

RBI Policy: MPC Cuts Repo Rate by 25 Basis Points to 6.25%

Dr Ravindra H. Dholakia, Dr Pami Dua, Dr Michael Debabrata Patra and Shri Shaktikanta Das voted in favour of rate cut decision while Dr Chetan Ghate and Dr Viral V. Acharya voted to keep the policy rate unchanged.

The repo rate is the rate at which the Reserve Bank lends short-term money to the banks, while the reserve repo rate is the rate at which the central bank borrows money from commercial banks.

The last rate cut by the RBI, to 6.00 percent, was in August 2017.

"The central bank's commentary on inflation and growth supports a dovish outlook for the policy", said Shashank Mendiratta, an economist with IBM in New Delhi, noting that on growth the RBI once again highlighted downside risks to its forecast.

Addressing the media on MPC's decision, Das said that GDP projection for 2019-20 is 7.4%. Also, the collateral free lending limit for agriculture has been increased to Rs 160,000 from Rs 100, 000 earlier, which is positive for consumption. "Investment activity is recovering supported mainly by public spending on infrastructure", RBI Governor said.

The six-member Monetary Policy Committee (MPC), headed by RBI governor Shaktikanta Das, noted that large part of the current investment recovery has been driven by government spending and it was necessary to broad base the revival with a private sector boost. Past three governors have been blaming the banks for not passing on their rate cuts to customers, thus offsetting the efforts of the monetary authority to lower interest cost for the economy. The MPC expects inflation to ease from this point (2.8 percent for ongoing quarter; 3.2-3.4 percent for first half of next fiscal).

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It further said that in spite of soft crude oil prices and the lagged impact of the recent depreciation of the Indian rupee on net exports, slowing global demand could pose headwinds.

Headline inflation will likely persist within the RBI's tolerable level of 4 percent.

Among the factors it listed were: vegetable prices could rise that could cause food inflation to spike, the outlook on oil price continuing to remain hazy, the impact of global trade tensions, the "unusual spike in the prices of health and education", the volatility of financial markets and any change in the monsoon outcome.

The MPC reduced the policy repo rate by 25 basis points from 6.5 per cent to 6.25 per cent.

All said, it was a refreshingly straightforward and pragmatic monetary policy review bringing in perhaps a new era of more elaborate communication from the central banks, now in India just after Fed also started press conference at every FOMC meet.

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