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

08 February, 2019, 09:43 | Author: Sally Reid
  • Explained Why the RBI's decision to cut repo rate comes as a surprise

Unveiling his maiden monetary policy on Thursday, RBI governor Shaktikanta Das announced a quarter percentage point rate cut, citing lower-than-expected inflation.

The ruling Bharatiya Janata Party is already in an election mode. In its budget on February 1, the government doled out cash to farmers and tax cuts to middle-class families, at the cost of a wider fiscal deficit and larger borrowing. "Investment activity is recovering supported mainly by public spending on infrastructure", RBI Governor said.

The Reserve Bank of India (RBI) reduced Repo rate by 25 basis points, now at 6.25 from 6.5 per cent on the basis of an assessment of the current and evolving macroeconomic situation. Just four months ago, the RBI had shifted its stance to calibrated tightening.

The central bank's surprise cut in interest rate could work well with the Narendra Modi government at the Centre which wants to boost growth in an election year.

Emboldened by a slowdown in inflation, the MPC under the new governor showed more concern about economic growth risks, paving the way for more rate cuts. Most polled respondents expected the central bank to only change the stance, to neutral. As headline inflation is way below target, MPC could have given 50 bps relaxation to industry.

India's core inflation was pegged at around 5.7 percent in December. The RBI has forecast inflation to be in the range of 3.2-3.4 per cent in April-September 2019, lower than its earlier prediction of 3.8-4.2%. The next meeting of the committee is scheduled from April 2 to April 4.

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The six-member monetary policy committee voted 4:2 in favour of the rate cut, while the decision to change policy stance was unanimous. MPC members Viral Acharya and Chetan Ghate voted against a rate cut.

Patel's exit prompted some to fret the RBI's independence was under threat, but some economists argued that Thursday's decision should not be read as a surrender to pressure.

Deviating from the practice of releasing the resolution of MPC in afternoon, the Reserve Bank of India (RBI) uploaded the policy statement it on its website at 11.45 am on February 7.

"To see this as a capitulation of the government's demands is profoundly misguided", said Abheek Barua, chief economist of HDFC Bank. The governor also indicated that there was scope for further rate cuts this year if prices do not rise.

The rupee weakened to 71.69 to the dollar immediately after the announced but strengthened soon after to 71.42.

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