RBI cuts repo rate in first policy review under new governor

Daniel Fowler
February 7, 2019

With inflation concerns easing, the Reserve Bank of India on Thursday cut the repo rate by 25 basis points to 6.25 per cent and changed the monetary policy stance from calibrated tightening to neutral.

The repo rate cut, coming after a gap of 18 months, will nudge banks to cut interest rates on loans for borrowers and provide a stimulus for demand in the economy. The Federal Reserve has changed direction, and now many analysts expect no USA rate hikes this year, after four in 2018. 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.

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

Analysts say India needs to regularly record growth of at least eight percent to generate employment for the millions entering the workforce each year.

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. Markets also surged on across-the-board buying amid expectations of shift in RBI's policy stance and rate cut. Even then, the first MPC meeting presided by new governor Shaktikanta Das was keenly watched by policy watchers for various reasons.

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Economic growth fell to a worse-than-expected 7.1 percent in the July-September quarter from 8.2 percent in the previous one, due to slower consumer spending and farm growth. "The decision to change the monetary policy stance was unanimous", the RBI said in a release after the meeting.

The Reserve Bank of India (RBI) on Thursday retained the country's gross domestic product (GDP) forecast for FY20 at 7.4 per cent. Addressing the media on Monetary Policy, RBI Governor Shaktikanta Das said GDP projection for 2019-20 is 7.4 per cent while the inflation rate is estimated at 3.2-3.4 per cent in the first half of the year 2019-20 and 3.9 per cent in the third quarter of 2019-20.

"To see this as a capitulation of the government's demands is profoundly misguided", said Abheek Barua, chief economist of HDFC Bank. What all this means is that if inflation doesn't surprise on the upside, there will be more rate cuts going ahead.

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

The NSE Nifty initially slipped but closee up 0.06 percent at 11,069.40 while the 10-year benchmark government bond yield fell to 7.51 percent from Wednesday's close of 7.56 percent.

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