RBI Policy: MPC Cuts Repo Rate by 25 Basis Points to 6.25%

07 February, 2019, 20:09 | Author: Billie Castillo
  • RBI interest rate,repo rate,GDP

A former economic affairs secretary, who now has the charge of central bank and is perceived to be close to the Union government, will not take "no" from banks on rate cuts too quickly.

The Reserve Bank of India's (RBI) surprise decision to cut interest rates for the first time in 18 months on Thursday is a pre-election stimulus gift from a compliant central bank for Prime Minister Narendra Modi.

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.

"The rate cut is unlikely to give a major fillip to investments as capacity utilisation still remains low in the manufacturing sector", said Devendra Kumar Pant, chief economist, India Ratings & Research, the arm of rating agency Fitch.

RBI Governor Shaktikanta Das said, "we are constantly & continuously monitoring the liquidity situation and based on the requirement we will ensure that there is no liquidity scarcity".

Some politicians and stock market analysts said the rate cut decision may not improve Modi's chances in the election as the banks could take time to pass on rate cut benefits. "The need is to strengthen private investment activity and buttress private consumption", the policy said.

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Listing the factors that influenced the growth outlook, the central bank said, "First, aggregate bank credit and overall financial flows to the commercial sector continue to be strong, but are yet to be broad-based".

It further said that 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.

It also wants to focus mainly on headline figures, not just the core part of inflation. This could allow the RBI more elbow room to lower lending rates, eventually bringing down borrowing costs for individuals and corporate houses.

Among the factors it listed were: vegetable prices could rise that could cause food inflation to spike, the outlook on oil price continuing to remain hazy, the impact of global trade tensions, the "unusual spike in the prices of health and education", the volatility of financial markets and any change in the monsoon outcome.

The RBI had maintained status quo on the key lending rate (repo) in its last three bi-monthly policy reviews after raising the rate twice by 25 basis points each in the fiscal. "Growth in rural wages moderated in October", RBI said.

Mumbai: The Reserve Bank of India (RBI) on Thursday unexpectedly lowered interest rates and as anticipated, shifted its stance to "neutral" from "calibrated tightening" to boost a slowing economy after a sharp fall in the inflation rate.

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