Published: Thu, February 07, 2019
Business | By Eloise Houston

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%

This is Das' first monetary policy review after taking charge as the RBI Governor, replacing Urjit Patel. Das didn't disappoint and has announced an eventful policy.

The RBI policy is a very dovish one and signals further rate cuts.

The RBI raised rates twice past year over concerns about rising prices but with inflation now at an 18-month low the bank said it was time to opt for a reduction.

The committee changed the monetary policy stance from calibrated tightening to neutral.

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.

The inflation rate is estimated at 3.2-3.4% in the first half of the year 2019-20 and 3.9% in the third quarter of 2019-20, he said. It also stayed below RBI's inflation target of 4 per cent for five consecutive months. If the banks decide to pass on the rate cut, then the auto, home and other loans are likely to get cheaper. The stimulus may be inflationary, and is reason enough for the central bank to defer any monetary easing, according to some economists.

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.

Even though at the RBI pressure, Das maintained that the decision on lending rates would be left to the banks and was quick to add that he would meet bank heads soon where issue of inadequate monetary transmission would be discussed. The 'repo rate is a key interest rate at which the Central Bank lends short-term funds to commercial banks.

"Headline inflation is projected to remain soft in the near term reflecting the current low level of inflation and the benign food inflation outlook", the statement said, but cautioned that beyond the near term, some uncertainties warrant careful monitoring such as volatile vegetable prices, crude oil prices and trade tensions.

In today's policy also, there are enough hints to believe that inflation fight has finally been ranked down in the central bank's priority list with growth worries are beginning to dominate.

The MPC noted that that the output gap has opened up modestly as actual output has inched lower than potential.

"Investment activity is recovering but supported mainly by public spending on infrastructure", news agency Reuters reported quoting the MPC. "The need is to strengthen private investment activity and buttress private consumption", it said.

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