RBI cuts repo rate by 25 basis points to 6.25%

Gladys Abbott
February 7, 2019

The central bank also changed its monetary policy stance - a key signalling indicator to the markets -to "neutral" from "calibrated tightening". In line with expectations, the monetary policy committee (MPC) members also unanimously voted to change the policy stance to neutral whereas rate cut was voted 4-2.

The repo rate is the rate at which banks borrow from the RBI in case of shortage of funds. As headline inflation is way below target, MPC could have given 50 bps relaxation to industry.

This was also the last meeting of the MPC before the Election Commission announces the dates for the Lok Sabha elections.

In a tweet, Economic Affairs Secretary Subhash Chandra Garg welcomed the rate cut and stance change, saying the MPC had come up with a "balanced and pragmatic policy statement".

Owing to benign inflation numbers, the central bank changed its policy stance to neutral from calibrated tightening, adopted in October policy meet past year under the then RBI Governor Urjit Patel.

The central bank committee also made a decision to stick to the Central Statistical Organization's growth estimate of 7.4% for 2019-20 and a range of 7.2%-7.4% for the first half of the next fiscal year.

The Fed has indicated it will slow its pace of rate hikes this year, having raised them four times in 2018, the European Central Bank has indicated that it is not looking to move on rates and the Bank of Japan has again lowered its inflation forecasts. Previously, it had projected inflation in a range of 2.7 per cent to 3.2 per cent in the six months to March.

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India's finance ministry had reportedly been pressuring the bank to enact policies to help spur growth ahead of the elections due by May, when Modi will run for a second term.

The Indian economy is expected to grow at 7.2 per cent in 2018-19, higher from the 6.7 per cent in 2017-18.

"The central bank's commentary on inflation and growth support a dovish outlook for the policy", said Shashank Mendiratta, an economist with IBM in New Delhi, adding "The macro backdrop as such supports the RBI's stance". "The need is to strengthen private investment activity and buttress private consumption", the policy said.

The committee though flagged external headwinds including trade tensions, and crude oil prices, which though appear well-behaved now.

"Finally, several proposals in the union budget for 2019-20 are likely to boost aggregate demand by raising disposable incomes, but the full effect of some of the measures is likely to materialise over a period of time", the committee said in the statement.

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