RBI cuts repo rate by 25 basis points to 6.25%

Ann Santiago
February 8, 2019

Shares of automobile companies were trading higher by up to 5 per cent on the National Stock Exchange (NSE), after the Monetary Policy Committee (MPC) of Reserve Bank of India (RBI) in its sixth bi-monthly monetary policy meeting on Thursday cut the repo rate by 25 bps to 6.25 per cent from 6.50 per cent, earlier.

This is Das' first monetary policy review after taking charge as the RBI Governor, replacing Urjit Patel.

More importantly, the MPC has spelt out the change in policy stance to "neutral" from what was called "calibrated tightening so far". The reverse repo rate stands adjusted to 6.0 per cent, and the marginal standing facility rate and the bank rate has been kept 6.5 per cent. The next meeting of the MPC is scheduled from April 2 to 4.

India's last rate cut, to 6.00%, was in August 2017. He, however, added that the RBI's track record in projection inflation accurately is no different from the experience of global central banks, who have also seen inflation veer off the expected track in recent years.

Four of six members of the MPC voted to cut the rates, while all six voted for a change in the stance.

Assuming a normal monsoon in 2019, headline inflation estimates are revised downwards to 2.8 per cent in Q4, FY19, 3.2-3.4 per cent in the first half of FY20 and 3.9 per cent during the third quarter of FY20, with risks broadly balanced around the central trajectory.

Going ahead, the RBI said, the short-term outlook for food inflation appears particularly benign, despite adverse base effects.

The CSO has estimated GDP growth at 7.2 per cent for 2018-19.

"The MPC notes that the output gap has opened up modestly as actual output has inched lower than potential".

It said the interim budget proposals will boost demand by raising disposable incomes but may take time to play out.

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

RBI has decided enhancement of collateral free agriculture loan from Rs 1 lakh to Rs 1.6 lakhs.

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