The first monetary policy meeting under the new governor Shaktikanta Das, the Reserve Bank of India (RBI) in its sixth bi-monthly monetary policy meeting on Thursday cut the repo rate to 6.25 per cent from 6.50 per cent, earlier.
Repo rate is the rate at which the central bank of a country (RBI in case of India) lends to the commercial banks in case of any shortage of funds.The reverse repo rate stands at 6 per cent.
This is the first rate cut after 18 months due to persistent low inflation.
The central bank also cut its estimates on headline inflation, which cooled off to an 18-month low of 2.2 percent in December, for the next year.It expects the inflation numbers to print in at 2.8 percent in the March quarter, 3.2-3.4 percent in first half of the next fiscal and 3.9 percent in the third quarter of 2019-20.
Under the former RBI Governor Urjit Patel, the RBI had raised interest rates twice last year and stuck to a 'calibrated tightening' stance in December.
The Committee also changed its stance to 'neutral' from the 'calibrated tightening' adopted in October meeting last year.The MPC unanimously voted to change the stance to neutral.
“The shift in stance of monetary policy from calibrated tightening to neutral also provides flexibility and the room to address the challenges to sustain growth of the Indian economy over the coming months, as long as the inflation outlook remains benign. The decisions of the MPC in this regard will be data driven and in consonance with the primary objective of monetary policy to maintain price stability while keeping in mind the objective of growth, said Das..
CPI is seen at 2.8 per cent in January-March, 2019 and 3.2-3.4 per cent in April-September 2019, the committee said in its press release.
On the macro front, India's retail inflation in December eased to 2.19 per cent from a rise of 2.33 per cent in November. In its December policy statement, the RBI forecast headline inflation at 3.8 per cent to 4.2 per cent in the six months starting April, not very far from its medium-term target of 4 per cent.
As many as 32 of the 43 economists surveyed by Bloomberg as of Wednesday had expected the central bank to keep the repo rate steady but drop its hawkish bias.
India Inc cheers RBI rate cut
India Inc on February 7 cheered RBI's move to slash key interest rate by 25 basis points and hoped it would encourage banks to lower lending rates, thereby stimulating consumption and investment demand to boost economic growth.
"The 25 bps reduction in repo rate taken together with the shift in RBI's stance from 'calibrated tightening' to a 'neutral approach', would go a long way in lifting sentiment among businesses," CII President Rakesh Bharti Mittal said.
He said the rate cut is in the right direction, given that the inflation footprint has been benign for some time.
"The resumption of rate easing cycle, which is anticipated to bring down banks' lending rates, will provide a fillip to both consumption and investment demand," Mittal said.
As per Ficci, which had hoped for a larger cut in repo rate, the 25 bps reduction will be followed up with more such measures in the subsequent months.
Ficci President Sandip Somany said the monetary policy should complement the fiscal policy and strengthen the growth impulses slowly building in the economy.
"This is important as we do not foresee much impetus coming from external sources of growth as the global economy continues to show signs of moderation. In such a scenario, all levers must be used to strengthen India's domestic economy through greater consumption demand and investments," Somany said.
“We believe that the future trajectory will be driven by open market operations (OMO). We do not expect large downward movement in yields due to the significant Government borrowing program over the coming months. RBI also announced several measures to ease funding costs and liquidity for the NBFC sector, which is a welcome move given the stress that the sector is under,'' said ,Mihir Vora, Director & Chief Investment Officer, Max Life Insurance,.
Kunal Shah, fund manager,Debt, Kotak Mahindra Life Insurance, said markets will start pricing in the possibility of one more rate cut in next 6 months if oil prices remain low. The benchmark 10-year bond will trade in the range of 7.20-7.35% till the announcement of the borrowing calendar for FY 20.”
Sampath Reddy, Chief Investment Officer, Bajaj Allianz Life Insurance Company said, RBI forecasted GDP growth for FY20 at 7.4%, with risks evenly balanced.
“Overall, we feel that RBI’s focus has changed from inflation primarily, to a combination of inflation and supporting growth, considering that price stability has been achieved and inflation is well below the official targets. From an investment perspective, we continue to prefer the shorter to medium term part of the yield curve.'' he said .