RBI Monetary Policy: Repo Rate Cut By 25 Basis Points

June was the fourth policy review in succession that the MPC had kept the repo rate unchanged.

India’s monetary policy committee (MPC) on Wednesday voted to cut interest rates in response to a steeper-than-expected fall in inflation, and maintained a neutral policy stance. The decision was in line with a Bloomberg poll of economists where a majority of respondents had forecast a 25-basis-point cut in rates.

Four members voted in favour of a 25-basis-point cut, one member voted for a 50-basis-point cut and one voted for status quo.

Following the decision, the benchmark repo rate stands reduced to 6 percent from 6.25 percent earlier. Accordingly, the reverse repo rate has been pegged down to 5.75 percent.

‘Upside Inflation Risks Waned’

“Some of the upside risks to inflation have either reduced or not materialised. Consequently, some space has opened up for monetary policy accommodation, given the dynamics of the output gap,” the policy statement said.

Noting, however, that the trajectory of inflation in the baseline projection is expected to rise from current lows, the MPC decided to keep the policy stance neutral and to watch incoming data. The MPC remains focused on its commitment to keeping headline inflation close to 4 percent on a durable basis.  

RBI Policy Statement 

The rate cut follows a drop in retail inflation to a level below the mandated range of 2-6 percent . Consumer price inflation fell to 1.54 percent in June, driven down by both food prices and softer core inflation. As per the monetary policy framework, the MPC has a mandate to maintain inflation in a band of 4 percent (+/- 2 percent).

To be sure, the MPC does not need to react to one month’s inflation. However, a number of analysts have suggested that recent trends point to a structural decline in inflation.

Excess supply conditions continue to push down prices of pulses and keep those of cereals in check. The MPC will continue monitoring movements in inflation to ascertain if recent soft readings are transient or if a more durable disinflation is underway.  

“Inflation expected to rise from current lows going ahead. Farm loan waiver, GST, pay hikes are risks,” RBI Governor Urjit Patel said while addressing the media after the policy announcement.

Projections Unchanged

The central bank made no change in its projections for the current fiscal. The forecast for gross value added growth for the fiscal 2017-18 has been maintained at 7.3 percent.

There is an urgent need to invigorate private investment and remove bottlenecks. Working to resolve large corporate loans.

Growth indicators, which have weakened, added to calls for a rate cut. GDP growth for the March-ended quarter slipped to 6.1 percent. High frequency indicators like growth in core sector industries and the manufacturing purchasing managers’ index have are also pointing to some volatility in the economy.

Policy Rate Transmission

On new lending, the transmission in policy rate has been much stronger, especially in segments where there is high competition, Patel said. The part of the loan portfolio that is tied up on account of base rate the transmission has been slower, he added.

Given the prevailing liquidity scenario, there is scope for banks to reduce lending for those segments that have not gained the benefit. 

Urjit Patel, RBI Governor 

Experience With MCLR Not ‘Entirely Satisfactory’: Viral Acharya

The experience with marginal cost of funds based lending rates has not been “entirely satisfactory,” according to Acharya. The RBI has constituted a study group to determine whether bank lending rate can be linked to market determined benchmarks, he told reporters at the policy press conference. The report will be submitted by September.

The RBI will also introduce final guidelines for triparite repo – is a type of repo transaction where a third entity called a Tri-party Agent will act as an intermediary, Acharya said. This agent will facilitate services like collateral selection, payment and settlement, custody and management. The introduction of tripartite repo was part of the recommendations of the HR Khan committee report on development of corporate bond market.

Market Reaction

Following the policy announcement, the yield on the 6.79 percent 2027 government bond rose 3 basis points to 6.47 percent. The rupee strengthened by 0.6 percent to 63.730 against the dollar. The benchmark Nifty 50, however, extended losses even though the policy decision was along expected lines.

(Read more about this on BloombergQuint.)

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