Saturday, 23 February, 2019

RBI Slashes Repo Rate by 25 Basis Points, Changes Stance to 'Neutral'

Home auto loans set to be cheaper as RBI Governor Shaktikanta Das cuts interest rates by 0.25 Explained: Why RBI’s decision to cut repo rate comes as a surprise
Priscilla Morrison | 07 February, 2019, 12:57

"The decision to change the monetary policy stance was unanimous", the RBI said in a release after the meeting.

The six-member Monetary Policy Committee (MPC) of the Reserve Bank of India (RBI) made a decision to reduce the key policy rate or the repo rate by 25 bps to 6.25% in the last bimonthly policy review of 2018-19 while changing the policy stance to "neutral" from "calibrated tightening".

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

In its previous monetary policy review in December 2018, the RBI had kept interest rates unchanged but held out a promise to cut them if the upside risks to the inflation do not materialise. The move could spur banks and non-banking finance companies into reducing their lending rates for consumer and home loans, resulting in lower EMIs for borrowers.

The ruling Bharatiya Janata Party is already in an election mode.

Das also downplayed the risk of inflation rising due to the forecast of fiscal slippage in last week's budget, and said the MPC will only look at the headline inflation number and ignore core inflation that has proven sticky. The RBI has thus cut rate for the first time in 17 months since August 2017. In its budget on Feb 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.

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In its December policy statement, the RBI forecast headline inflation at 3.8 percent to 4.2 percent in the six months starting April, not very far from its medium-term target of 4 percent. The CSO has estimated GDP growth at 7.2 per cent for 2018-19.

This was the first policy of RBI Governor Shaktikanta Das, who heads the MPC.

"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 MPC on Thursday cut repo rate by 25 basis points to 6.25 percent with Das, Ravindra Dholakia, Pami Dua and Michael Debabrata Patra voting in favour of the decision.

The Reserve Bank of India headed by a new chief, Shaktikanta Das, will probably drop its hawkish bias on Thursday, the first step toward a possible interest-rate cut this year as inflation drifts lower and the economy slows.

The National Stock Exchange of India (NSE) Nifty was up 0.04% at 11068.05 while the ten-year benchmark government bond yield fell to 7.51% from Wednesday's close of 7.56%.

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