Ramsurya Mamidenna, MUMBAI: The Reserve Bank of India on Tuesday cut repo rates by 25 basis points,
citing falling inflation as the main reason for the move and surprising markets that were widely expecting a status quo.
Retail inflation eased to a five-month low of 5.05% in August, within the committee’s 2-6% objective, and is expected to ease further in the months ahead after a good monsoon has sent food prices sharply lower.
The move to slash the repo rate – the rate at which banks borrow from the RBI – to 6.25% from 6.50% was taken by the newly-formed Monetary Policy Committee (MPC), which is chaired by governor Urjit Patel.
This is Patel’s first policy review after taking over from Raghuram Rajan on September 6. With Tuesday’s cut, the repo rate is now at its lowest level since November 2010.
“On the basis of an assessment of the current and evolving macroeconomic situation at its meeting today, the Monetary Policy Committee decided to reduce the policy repo rate by 25 basis points, from 6.5% to 6.25% with immediate effect. The decision of the MPC is consistent with an accommodative stance of monetary policy in consonance with the objective of achieving consumer price index inflation at 5% by Q4 of 2016-17 and the medium-term target of 4%, while supporting growth,” the RBI explained.
The RBI said all six members voted in favour of the rate cut, but did not give a breakdown.
The MPC was being viewed predominantly as being cautious of inflation and was thus considered hawkish. In economic terms, a hawk is someone who favours a monetary policy focussed on inflation, while a dove tailors policy to suit growth.
In its assessment of the hawk-dove split of the current six MPC members, Japanese financial services firm Nomura categorised government nominee Ravindra Dholakia as a dove, Pami Dua and RBI deputy governor R Gandhi as neutral, government nominee Chetan Ghate as neutral-hawk, RBI executive director Michael Patra and committee’s chairman Urjit Patel as hawkish. Thus the decision came as a surprise.
On business expectations, the central bank said the strong public investment in roads, railways and inland waterways, the recent efforts to unclog cash flows in large projects under arbitration, and the boost to spending from the 7th Pay Commission’s award, should improve the industrial outlook.
While BSE Sensex was up 0.33%, the broader NSE Nifty was up 0.34%. The rupee extended gains to 66.40 per dollar from 66.47.
In the March-June quarter economic expansion slowed to 7.1% annually from 7.9% in the previous quarter, though that still places India among the world’s fastest-growing economies.
While the MPC has been given a mandate of “maintaining price stability,” it must do so “while keeping in mind the objective of growth,” according to the amended RBI Act.
(With Reuters inputs)