RBI cuts repo rate in first policy review under new governor

Irving Hamilton
February 7, 2019

Four of six MPC members voted to cut the rates, while all backed the stance change to "neutral" from "calibrated tightening". The RBI has thus cut rate for the first time in 17 months since August 2017.

RBI Governor Shaktikanta Das cut the interest rate by 0.25 percent to 6.25 percent, a move that will lead to reduction of lending rate by banks leading to lower EMI for housing, vehicle loan and corporate borrowers.

It marked the first interest rate decision under new bank chief Shaktikanta Das, an ally of Modi who was appointed in December after his predecessor, Urjit Patel, quit following a public spat with the administration over alleged government interference.

On the growth front, which the RBI has pencilled in a 7.4 per cent uptick, Das said progress of the monsoons, crude prices and external situation, including the fate of Brexit and trade wars, are the things to watch out for.

The RBI also eased bank lending restrictions for non-banking finance companies and raised the limit on "collateral free" farm loans in an attempt to boost lending to almost 120 million rural households.

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Banks have also been given greater operational freedom to offer interest rates to bulk deposits, raising the definition of "bulk deposits" to Rs 2 crore from Rs 1 crore now. Das also reaffirmed the RBI's commitment to ensure there is adequate liquidity available in the market saying no sector in the economy will be starved of growth funds. "The need is to strengthen private investment activity and buttress private consumption", the policy said. The RBI projected that consumer price inflation, the primary price gauge that it tracks for interest rate decisions, will be around 3.2-3.4 percent during April-September 2019, reflecting the current low inflation levels and benign food price outlook.

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

"On the basis of an assessment of the current and evolving macroeconomic situation at its meeting today, the Monetary Policy Committee (MPC) chose to reduce the policy repo rate under the liquidity adjustment facility (LAF) by 25 basis points from 6.50% to 6.25% with immediate effect", the RBI said in a statement. As headline inflation is way below target, MPC could have given 50 bps relaxation to industry.

The RBI, however, said that "some uncertainties warrant careful monitoring", flagging seven key issues. "Change of stance to neutral is positive as it means we can look forward to future rate cuts".

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