Published: Thu, February 07, 2019
Money | By Ralph Mccoy

RBI: Repo rate reduced by 25 basis points

RBI: Repo rate reduced by 25 basis points

The MPC expects inflation to ease from this point (2.8 percent for ongoing quarter; 3.2-3.4 percent for first half of next fiscal).

The last rate cut was announced in August 2017 and was followed by two hikes of 25 bps each a year ago. "The decision to change the monetary policy stance was unanimous", the RBI said in a release after the meeting.

In the past, even when the RBI has signalled lower rates, this rate transmission never really happened because banks always found a way to ignore the central bank's policy cues.

The MPC noted that retail inflation will remain soft in the near term. "The rate cut is also driven by the fact that inflation has significantly surprised on the downside". The Federal Reserve has changed direction, and now many analysts expect no USA rate hikes this year, after four in 2018. Central banks in the Philippines and Thailand also held rates steady this week.

The cut in borrowing costs in Asia's third-biggest economy comes as the economy stutters and other central banks, most notably the Federal Reserve, have sounded increasingly cautious about the global outlook. The currency later reversed losses and was little changed at 71.5275 against the dollar as of 2:00 pm in Mumbai.

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 previous year.

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Dr Ravindra H. Dholakia, Dr Pami Dua, Dr Michael Debabrata Patra and Shri Shaktikanta Das voted in favour of rate cut decision while Dr Chetan Ghate and Dr Viral V. Acharya voted to keep the policy rate unchanged.

Sonal Varma, chief India economist at Nomura Holdings Singapore, said the RBI's autonomy wasn't at issue this time around. The central bank had maintained the status quo in the last two Monetary Policy Committee meetings. "But there should be consistency in views over a period of time".

The committee today cut the policy interest rate, the repo rate, by 25 basis points to 6.25%, driven by persistently low headline inflation.

With inflation largely under control, the big concern for the government is growth, particularly in an election year. Last week it unveiled an expansionary budget, which included $13 billion of consumer stimulus ahead of an election.

The central bank committee also chose to stick to the Central Statistical Organization's growth estimate of 7.4% for 2019-20 and a range of 7.2%-7.4% for the first half of the next fiscal year.

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