RBI cuts repo rate in its maiden policy review under Shaktikanta Das;
The monetary policy committee cut repo rate by 25 basis points to 6.25 percent in its sixth bi-monthly monetary policy. Consequently, the reverse repo has come down to 6 percent.
And the marginal standing facility (MSF) rate and the Bank Rate come down to 6.5 percent.
The six-member MPC, headed by Reserve Bank of India (RBI) governor Shaktikanta Das, also decided to change the monetary policy stance from calibrated tightening to neutral.
“On the basis of an assessment of the current and evolving macroeconomic situation at its meeting today, the Monetary Policy Committee (MPC) decided to reduce the policy repo rate under the liquidity adjustment facility (LAF) by 25 basis points from 6.5 per cent to 6.25 per cent with immediate effect,” said the policy statement.
RBI in its statement said that these decisions are in consonance with the objective of achieving the medium-term target for consumer price index (CPI) inflation of 4 percent within a band of +/- 2 percent, while supporting growth.
The Consumer Price Index (CPI) inflation has been revised downwards to 2.8 percent in Q4FY19, 3.2-3.4 percent in H1FY20 and 3.9 percent in Q3FY20, with risks broadly balanced around the central trajectory.
MPC noted that there have been downward revisions in inflation projections during the course of the year reflecting mainly the unprecedented soft inflation recorded across food sub-groups.
In the fifth bi-monthly monetary policy, CPI inflation for 2018-19 was projected in the range of 2.7-3.2 percent in H2FY19 and 3.8-4.2 percent in H1FY20, with risks tilted to the upside.
“The actual inflation outcome at 2.6 percent in Q3FY19 was marginally lower than the projection,” said the RBI statement. This is the first policy under the new RBI governor and the last one for this financial year.
GDP growth for FY20 has been projected at 7.4 percent, in the range of 7.2-7.4 percent in H1FY20, and 7.5 percent in Q3FY20 with risks evenly balanced. In the December policy, it was projected at 7.4 percent (7.2-7.3 percent in H2) and at 7.5 percent for H1FY20, with risks somewhat to the downside.
Retail inflation, measured by a year-on-year change in the CPI, declined from 3.4 percent in October 2018 to 2.2 percent in December, which was the lowest in the last 18 months.
RBI said that food inflation has continued to surprise on the downside with continuing deflation across several items and a significant moderation in inflation in cereals. It added that the short-term outlook for food inflation appears particularly benign, despite adverse base effects.
Secondly, RBI explained that the moderation in the fuel group was larger than anticipated. Also, it pointed out that while inflation excluding food and fuel remains elevated, the recent unusual pick-up in the prices of health and education could be a one-off phenomenon. It also said that the effect of the HRA increase for central government employees has dissipated completely along expected lines.
RBI said that the aggregate bank credit and overall financial flows to the commercial sector continue to be strong, but are yet to be broad-based. Secondly, in spite of soft crude oil prices and the lagged impact of the recent depreciation of the Indian rupee on net exports, slowing global demand could pose headwinds.
“In particular, trade tensions and associated uncertainties appear to be moderating global growth,” said RBI.
The MPC statement said that while investment activity is recovering, it is supported mainly by public spending on infrastructure. The need is to strengthen private investment activity and buttress private consumption, it added.
In the December policy, the policy repo rates and the stance was kept unchanged.
The decision to change the monetary policy stance was unanimous. On the repo rate reduction, Ravindra Dholakia, Pami Dua, Michael Patra and RBI governor Shaktikanta Das voted in favour of the decision. Chetan Ghate and Viral Acharya voted to keep the policy rate unchanged.
The MPC reiterated that its aim was to achieve the medium-term target for headline inflation of 4 percent on a durable basis.