Published: Thu, February 07, 2019
Economy | By

Explained: Why RBI’s decision to cut repo rate comes as a surprise

Explained: Why RBI’s decision to cut repo rate comes as a surprise

The repurchase rate will probably be kept steady at 6.5 percent, according to 32 of the 43 economists surveyed by Bloomberg as of Wednesday, with the rest expecting a 25 basis-point reduction. A career bureaucrat, Das is seen as more dovish on policy than his predecessor Urjit Patel, who quit in December following attacks on the central bank's autonomy.

The six-member Monetary Policy Committee (MPC) of the Reserve Bank of India (RBI) made a decision to reduce the key policy rate or the repo rate by 25 bps to 6.25% in the last bimonthly policy review of 2018-19 while changing the policy stance to "neutral" from "calibrated tightening". This is the first rate cut announced by the MPC since August 2017.

Under Patel, the RBI raised interest rates twice previous year and stuck to a "calibrated tightening" stance in December.

"Consequently, the reverse repo rate under the LAF stands adjusted to 6.0%, and the marginal standing facility (MSF) rate and the Bank Rate to 6.5%", it added.

The MPC noted that retail inflation will remain soft in the near term.


Interestingly, while the decision to change the monetary policy stance was unanimous, on the repo rate cut, it was a 4-2 decision.

With headline inflation hovering at multi-month lows, India's real interest rate makes it a standout in the region, and harmful to economic growth, according to analysts including Bank of America Merrill Lynch's Chief Economist Indranil Sen Gupta.

"Taking into consideration these developments and assuming a normal monsoon in 2019, the path of CPI inflation is revised downwards to 2.8% in Q4:2018-19, 3.2-3.4% in H1:2019-20 and 3.9% in Q3:2019-20, with risks broadly balanced around the central trajectory", it said.

"Investment activity is recovering but supported mainly by public spending on infrastructure", the MPC said in a statement.

The Reserve Bank of India (RBI) on Thursday retained the country's gross domestic product (GDP) forecast for FY20 at 7.4 per cent. Addressing the media on Monetary Policy, RBI Governor Shaktikanta Das said GDP projection for 2019-20 is 7.4 per cent while the inflation rate is estimated at 3.2-3.4 per cent in the first half of the year 2019-20 and 3.9 per cent in the third quarter of 2019-20. MPC members Viral Acharya and Chetan Ghate voted against a rate cut.

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