1. What compelled RBI’s Urjit Patel and other MPC members to cut repo rate by 25 bps

What compelled RBI’s Urjit Patel and other MPC members to cut repo rate by 25 bps

Urjit Patel, RBI and MPC cheered markets, India Inc and consumers during the festive season by cutting the repo rate by 25 basis points in the bi-monthly monetary policy review.

By: | Updated: October 4, 2016 3:50 PM
RBI Policy, RBI Monetary Policy, RBI Policy Today, rbi policy announcement today, rbi policy announcement This is the first RBI policy that was decided under the new Monetary Policy Committee (MPC) framework.

Urjit Patel, RBI and MPC cheered markets, India Inc and consumers during the festive season by cutting the repo rate by 25 basis points in the bi-monthly monetary policy review. This is the first RBI policy that was decided under the new Monetary Policy Committee (MPC) framework. Patel, who took over from Raghuram Rajan as the new RBI governor in early September is the man who authored the landmark MPC reform. Most analysts expected the RBI to cut rates by 25 basis points, but the fact that all six members of the MPC voted in favour of a cut shows that the central bank and the government are increasingly comfortable about the current inflation levels and their expected future trajectory.

The RBI statement also indicates that the biggest factor that seems to have worked in favour of a rate cut is good monsoon and the resulting decline in prices. “The Committee expects that the strong improvement in sowing, along with supply management measures, will improve the food inflation outlook. It notes that the sharp drop in inflation reflects a downward shift in the momentum of food inflation – which holds the key to future inflation outcomes – rather than merely the statistical effects of a favourable base effect,” the RBI statement said.

Also read: Urjit Patel’s first monetary policy review as RBI governor: All you want to know about him

RBI also lauded the government for taking effective supply side measures to keep inflation in check. “The Government has announced several measures to cool food inflation pressures, especially with regard to pulses. These measures should help in moderating the momentum of food inflation in the months ahead. This has opened up space for policy action, as indicated in the third bi-monthly monetary policy statement,” the central bank says.

Also read: Urjit Patel’s first policy review: RBI cuts repo rate by 25 bps under MPC framework

According to RBI, the MPC “took note of potential cost push pressures that may emerge, including the 7th pay commission award on house rent allowances, and the increase in minimum wages with possible spillovers through minimum support prices”. “The fuller play of these factors will need vigilance to prevent a generalised cost spiral from taking root. On balance, the Committee envisages a trajectory taking headline CPI inflation towards a central tendency of 5 per cent by March 2017, with risks tilted to the upside albeit lower than in the second and third bi-monthly monetary policy statements of June and August respectively,” the central bank concludes.

Also read: What is RBI’s Monetary Policy Committee and how does it work?

MPC or the Monetary Policy Committee is the new framework under which the RBI’s credit policy is decided. The MPC is a six-member committee, of which three members are from the RBI, and the other three are appointed by the Central government. The six member panel consists of; RBI governor (presently Urjit Patel), Deputy Governor of the Bank, in charge of Monetary Policy, One officer of the Bank to be nominated by the Central Board, Chetan Ghate, Professor, Indian Statistical Institute (appointed by government), Professor Pami Dua, Director, Delhi School of Economics (appointed by government), and Dr. Ravindra H. Dholakia, Professor, IIM-Ahmedabad (appointed by government).

Please Wait while comments are loading...

Go to Top