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techkenyot.com March 24, 2019


RBI cuts repo rate in first policy review under new governor

07 February 2019, 05:00 | Hattie Nash

RBI cuts repo rate in first policy review under new governor

RBI Policy MPC Cuts Benchmark Rate RBI Governor Emphasises Growth

The RBI's monetary policy xommittee (MPC) began its three-day meet on Tuesday to decide on key rates amid expectations that it may change its policy stance to "neutral" from "calibrated tightening" on low inflation footprint, even as a rate cut was ruled out by many experts. The MPC voted 4:2 in favour of the rate cut, while the decision to change policy stance was unanimous.

This was the first meeting of the monetary policy committee (MPC) under Shaktikanta Das who took over as the RBI governor in December after the sudden exit of Urjit Patel over differences with the Modi government.

The Reserve Bank of India headed by a new chief, Shaktikanta Das, will probably drop its hawkish bias on Thursday, the first step toward a possible interest-rate cut this year as inflation drifts lower and the economy slows.

The repo rate is the rate at which the Reserve Bank lends short-term money to the banks, while the reserve repo rate is the rate at which the central bank borrows money from commercial banks. While this "pre-election rate cut" might boost growth, the longer-term concerns for investors will be about the RBI's credibility as an inflation fighter, he added.

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Das also downplayed the risk of inflation rising due to the forecast of fiscal slippage in last week's budget, and said the MPC will only look at the headline inflation number and ignore core inflation that has proven sticky. "It also signals a commitment to a symmetric policy to achieve its 4 per cent inflation target - a departure from the RBI's previous one-sided, conservative stance that aimed to keep inflation below the target."- Abhishek Gupta, Bloomberg Economics.

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.

The biggest take away from the policy on Thursday is that this marks the beginning of a fresh rate cut cycle after a prolonged period of rate pause and the MPC wants the markets to understand that.

The decision "restores growth maximisation as a secondary objective of the RBI".

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Deviating from the practice of releasing the resolution of MPC in afternoon, the Reserve Bank of India (RBI) uploaded the policy statement it on its website at 11.45 am on February 7.

"Das has delivered what the Modi government was hoping for", said Mark Williams, chief Asia economist at Capital Economics Ltd.in London. "Going by the guidance, there is room for a further rate cut". The rupee weakened to 71.69 to the dollar immediately after the announcement but did strengthen to 71.42 soon.

The National Stock Exchange of India (NSE) Nifty was up 0.04% at 11068.05 while the ten-year benchmark government bond yield fell to 7.51% from Wednesday's close of 7.56%.

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