RBI: Repo rate reduced by 25 basis points

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

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

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 central bank's surprise cut in interest rate could work well with the Narendra Modi government at the Centre which wants to boost growth in an election year. The RBI has also changed its stance to "neutral" from existing "calibrated tightening". It was the first policy review by the RBI after appointment of its governor Shaktikanta Das in December previous year.

In December, it had introduced a new method for fixing floating loan charges-a move that will likely force banks to change home loan rates according to the way the RBI's repo rate or government bond yields move.

The RBI raised rates twice a year ago over concerns about rising prices but with inflation now at an 18-month low the bank said it was time to opt for a reduction. This is the first policy statement issued by the RBI under its newly appointed governor Shaktikanta Das. "The need is to strengthen private investment activity and buttress private consumption", it said.

Trade tensions and associated uncertainties appear to be moderating global growth, the bank said. Besides, it acknowledged domestic aggregate bank credit and overall financial flows to the commercial sector as robust, but yet to be broad-based. Taking into consideration key factors such as lower food inflation, moderation in the fuel group, recent unusual pick-up in the prices of health and education, crude oil prices outlook and moderation in inflation expectations of households, the CPI inflation is revised downwards to 2.8 per cent in fourth quarter of 2018-19 and 3.2-3.4 per cent in first half 2019-20 and 3.9 per cent in third quarter of 2019-20, with risks broadly balanced around the central trajectory.

The former finance secretary-turned governor explained that the price stability is defined as keeping the headline inflation number at the mandated 4 per cent in the medium-term and asserted that the Monetary Policy Committee has not done anything beyond the provisions of the RBI Act.

India's retail inflation declined from 3.4 per cent in October 2018 to 2.2 per cent in December, well below the bank's target of four percent. He said the central bank will be meeting the heads of banks in the next two to three weeks and assured to take up the matter with the bankers. Among the MPC members, Ravindra H. Dholakia, Pami Dua, Michael Debabrata Patra and Das voted in favour of a repo rate cut. MPC members Viral Acharya and Chetan Ghate voted against a rate cut.

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