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RBI cuts repo rate by 25 basis points to 6.25 per cent

05 Oct 2016 Evaluate

India's newly appointed Monetary Policy Committee (MPC), in its first meeting, decided to cut the policy rates under the liquidity adjustment facility (LAF) by 25 basis points to 6.25 per cent from 6.5 per cent with immediate effect. Consequently, the reverse repo rate under the LAF stands adjusted to 5.75 per cent, and the marginal standing facility (MSF) rate and the Bank Rate to 6.75 per cent.

All the six members of MPC were in favour of the rate cut, the Reserve Bank of India (RBI) said that the decision of the MPC is consistent with an accommodative stance of monetary policy in consonance with the objective of achieving consumer price index (CPI) inflation at 5 per cent by Q4 of 2016-17. The committee also retained the projection of growth of real gross value added (GVA) for 2016-17 at 7.6 per cent, with risks evenly balanced around it.

The RBI said that the committee expects strong improvement in sowing, along with supply management measures, which will improve the food inflation outlook. The sharp drop in inflation reflects a downward shift in the momentum of food inflation - which holds the key to future inflation outcomes -rather than merely the statistical effects of a favorable base effect.

The RBI also said that the momentum of growth is expected to quicken with a normal monsoon raising agricultural growth and rural demand, as well as by the stimulus to the urban consumption spending from the pay commission’s award. The accommodative stance of monetary policy and comfortable liquidity conditions should support a revival of credit to the productive sectors. It said that international financial markets were overwhelmed by the Brexit vote in Q2, with equity markets losing valuations worldwide, currencies plunging and turning volatile, and investors rushing for safe havens. Markets, however, recovered quickly and reclaimed lost ground in Q3, with a return of risk appetite propelling capital flows back into EMEs.

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