RBI cuts repo rate in first policy review under new governor

RBI cuts repo rate in first policy review under new governor

The RBI has thus cut rate for the first time in 17 months since August 2017.

These decisions are in consonance with the objective of achieving the medium-term target for consumer price index (CPI) inflation of 4 per cent within a band of +/- 2 per cent, while supporting growth, the committee said in its press release. The RBI has forecast inflation to be in the range of 3.2-3.4 per cent in April-September 2019, lower than its earlier prediction of 3.8-4.2%.

The rate cut continues a trend in which some major central banks, anxious about slowing global growth and helped by cooling inflation, have moved firmly away from last year's tightening moves or tones. However, growth is said to be slowing down in the second half of the fiscal.

With the US Federal Reserve signaling a pause in its rate-hike cycle, emerging markets from India to Indonesia are getting a breather as global risks mount.

Bonds gained, and the rupee declined 0.2 per cent immediately after the rate move.

The MPC meeting - the first for Das as governor - was closely watched after tension between the RBI and the government prompted his predecessor Urjit Patel to abruptly quit in December, amid government demands to relax lending curbs and hand over surplus reserves. Mr Patel had led the MPC to raise interest rates twice past year. The surprise move also came after calls from a top adviser of Prime Minister Narendra Modi for rate cuts to fire up the economy.

While four members of the MPC including Das voted for a rate cut, RBI deputy governor Viral Acharya and independent member Chetan Ghate, a professor at the Indian Statistical Institute were in favour of maintaining a status quo on rates.

Sonal Varma, chief India economist at Nomura, believes that the stance needs to be aligned with changing risks globally and locally.

"Every monetary policy committee member can and should have an independent view", she said.

The Monetary Policy Committee (MPC) on Thursday, 7 February, cut repo rate for the first time in 18 months and also unanimously changed its stance from "calibrated tightening" to "neutral".

"Headline inflation is expected to remain contained below or at its target of 4%".

Falling food prices have been the main driver of the inflation slowdown, though the core measure - which excludes food and fuel costs - remains elevated at around 6 per cent. Inflation projection for H1FY20 has been slashed by 70 bps to 3.3%, over and above 80 bps cut in the December policy review, suggest experts.

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