RBI cuts repo rate by 25 bps to 6% for second time in row, keeps stance 'neutral'

04 Apr 2019 Evaluate

The Reserve Bank of India’s (RBI) monetary policy committee (MPC), led by Governor Shaktikanta Das, has decided to cut repo rate by 25 basis points (bps) to 6.0% in its First Bi-monthly Monetary Policy Statement, 2019-20, to bring interest rate to the lowest level in one year on softening inflation. It was the first back-to-back rate cut by the central bank since the MPC was formed in late 2016. The rate cut was much in expected lines and the central bank has maintained 'Neutral' stance on the monetary policy. Consequently, the reverse repo rate under the LAF stands adjusted to 5.75%, and the marginal standing facility (MSF) rate and the Bank Rate to 6.25%. These decisions are in consonance with the objective of achieving the medium-term target for consumer price index (CPI) inflation of 4% within a band of +/- 2%, while supporting growth.

On the inflation front, the RBI has revised downward CPI inflation to 2.4% in Q4 of 2018-19, 2.9-3.0% in the first half of 2019-20 and 3.5-3.8% in the second half of 2019-20, mainly due to lower food and fuel prices as well as expectation of a normal rainy season. It said low food inflation during January-February will have a bearing on the near-term inflation outlook. The fall in the fuel group inflation witnessed at the time of the February policy has become accentuated and CPI inflation excluding food and fuel in February was lower than expected, which has imparted some downward bias to headline inflation. Besides, international crude oil prices have increased by around 10% since the last policy.

On the economic growth front, the Central Bank has projected Gross Domestic Product (GDP) growth at 7.2% for FY20, in the range of 7.2-7.4% in H1, and 7.5% in Q3 - with risks evenly balanced. It added that there are some signs of domestic investment activity weakening as reflected in a slowdown in production and imports of capital goods. The moderation of growth in the global economy might impact India’s exports. However, on the positive side, it said higher financial flows to the commercial sector augur well for economic activity. Private consumption, which has remained resilient, is also expected to get a fillip from public spending in rural areas and an increase in disposable incomes of households due to tax benefits.

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