RBI Slashes Repo Rate by 25 Basis Points, Changes Stance to 'Neutral'

Jeannie Matthews
February 8, 2019

India's rate cut continues a trend in which some major central banks, anxious about slowing global growth and helped by low inflation, have moved firmly away from the tightening moves made past year.

Commenting on the RBI rate cut, Ankur Dhawan- Chief Investment Officer-PropTiger.com, said "Industry was expecting a bigger rate cut than announced".

RBI has decided enhancement of collateral free agriculture loan from Rs 1 lakh to Rs 1.6 lakhs. However, it remains to be seen if the banks will quickly pass on the benefits of the rate cut to the borrowers. "The need is to strengthen private investment activity and buttress private consumption", the MPC statement said.

The MPC meeting - the first for RBI Governor Shaktikanta Das - also chose to lower India's inflation projection for April-September to 3.2-3.4% from the 3.8-4.2% seen in December.

There are few worry lines, both in the industrial sector, as well as the rural economy.

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". Oil prices and the lagged impact of the recent depreciation of the Indian rupee could be a drag on net exports while slowing global demand could pose headwinds.

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"The extended period of cold weather in this year's winter is likely to boost wheat yields, which would partly offset the shortfall, if any, in area sown", it said.

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

Observing that actual inflation in the third quarter of 2018-19 was marginally lower than what was projected, the RBI said, "There have been downward revisions in inflation projections during the course of the year, reflecting mainly the unprecedented soft inflation recorded across food sub-groups".

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. "We thought that the oil had just eased after the October policy, it was not prudent to withdraw the tightening policy stance right away in December itself", Acharya said.

India's central bank on Thursday unexpectedly lowered interest rates and, as anticipated, shifted its stance to "neutral" to boost a slowing economy after a sharp slide in the inflation rate. Among the MPC members, Ravindra H. Dholakia, Pami Dua, Michael Debabrata Patra and Das voted in favour of a repo rate cut.

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