U-Turn: RBI lowers repo rate first time since 2017
In a major policy shift, the six-member monetary policy committee (MPC) headed by Governor Shaktikanta Das on Thursday lowered the repo rate by 25 basis points to 6.25 per cent in a 4-2 vote. RBI has thus cut rate for the first time in 17 months. The last rate cut happened in August 2017.
The MPC also changed the policy stance to ‘neutral’ from ‘calibrated tightening’. This was first money policy review for the former economic affairs secretary, who took over as RBI Governor in the second week of December 2018.
In post-policy interaction with media, Das said that shift in stance to neutral provides flexibility to meet growth challenges. “Farm output was expected to decelerate in FY19. Continuing deflation in food and crude led to decline in headline inflation,” he added.
Das also emphasised on the need to strengthen private investment activity.
Headline inflation is projected to remain soft in the near term reflecting the current low level of inflation and the benign food inflation outlook. Consumer price inflation is seen at 2.4 in January-March period and 3.2-3.4 per cent from April to September.
Beyond the near term, some uncertainties warrant careful monitoring, RBI said.
April-September GDP growth, meanwhile, is seen at 7.2-7.4 per cent. “GDP growth for 2019-20 is projected at 7.4 per cent – in the range of 7.2-7.4 per cent in H1, and 7.5 per cent in Q3 – with risks evenly balanced,” the central bank said in the policy statement.
Deputy Governor Viral Acharya and another MPC member, Chetan Ghate, voted for status quo in interest rates, while Das and three others voted for a cut in interest rates.
Economists were largely expecting RBI to change policy stance first and then go for a rate cut in April, thereby smoothening expectations.
Repo or repurchase rate is where RBI lends money to commercial banks. India’s consumer inflation has averaged at 3 per cent in last five months against RBI’s Parliament-mandated target of 4 per cent. The economy is estimated to grow at 6.8 per cent during the second half of FY19.
“A rate cut should support the rupee as FPIs’ equity investments stand at seven times that in debt. Global rate pressures are also receding: our US economists see their 50 bps rate hike call for 2019 less likely with the Fed turning dovish,” global brokerage BofAML said in a report.
In its last policy review, RBI had said with both inflation and growth developing ‘soft spots’, it would wait and watch for a better assessment of the situation before coming up with an appropriate risk management policy.
Economists see upside risks to inflation following the recent Budget announcements.