The Reserve Bank of India in its monetary policy review today cut its key lending rate or the repo rate by 25 basis points to a six-year low of 6.25 per cent, from 6.5 per cent. Banks are expected to pass on the RBI rate cut to customers.
Today’s rate decision, the first in the tenure of new RBI chief Urijit Patel, also began a new era for the central bank. The policy decision was for the first time made by a six-member panel called Monetary Policy Committee or MPC; the decision was so far taken by the RBI governor alone.
All six members voted for a rate cut in a unanimous decision. Welcoming MPC members, Dr Patel in the post-policy media briefing said, “They will be a source of support to RBI and help enhance the process and quality of monetary policy making in the country.”
Markets cheered the move, with Sensex rising 91 points and Nifty closing above 8,750.
“Weak global demand is actually going to drag down trade volumes. It is possible that IMF may downgrade global growth further. There is also the issue of outcome of US presidential elections,” said Governor Urjit Patel, 52, who took over last month from Raghuram Rajan after serving for three years as a deputy governor.
Finance Secretary Ashok Lavasa said the RBI’s move will boost liquidity in the financial system as well as improve market sentiment.
On the MPC, Dr Patel’s is the casting vote. The other members are two Reserve Bank officials and three government nominated academics. The committee is bound by an inflation target of 4 per cent, plus or minus 2 percentage points as per its mandate, under the government’s monetary policy framework agreement with the RBI.
“The committee expects that the strong improvement in sowing, along with supply management measures, will improve the food inflation outlook. The government has announced several measures to cool food inflation pressures, especially with regard to pulses,” the RBI said in a statement.
On economic growth, the RBI expects momentum “to quicken with a normal monsoon raising agricultural growth and rural demand, as well as by the stimulus to the urban consumption spending from the pay commission’s award”. The RBI retained its GDP growth projection for this fiscal year at 7.6 per cent.
Atul Joshi, founder CEO of Oyster Capital, welcomed the RBI’s move. He said that lower rates will help India Inc which is struggling with weak demand, he said.
Commenting on RBI’s rate cut, Shubhada Rao, chief economist at Yes Bank, said: “This was along expected lines. That dominant pressure on headline inflation, mainly food, has begun to ease rapidly, which paved way for the 25 bps rate cut today.”
She also believes that RBI could cut repo rate by further 0.25 per cent this fiscal year. “We believe that inflation is likely to surprise on the downside by about 20-30 basis points by end March, compared to the 5 per cent stated by the RBI. As such, this could provide additional room for 25 bps rate cut in the current fiscal year,” she added.