RBI has cut repo rate by 50 bps! Will Raghuram Rajan go into prolonged pause mode now?

Published: September 29, 2015 6:51 PM

In a surprise move, the Reserve Bank of India (RBI) cut its repo rate by 50 basis points (bps) to 6.75%. The extent of the slash was unanticipated, but its timing was in line with our view that sufficient clarity on monsoon...

In a surprise move, the Reserve Bank of India (RBI) cut its repo rate by 50 basis points (bps) to 6.75%. The extent of the slash was unanticipated, but its timing was in line with our view that sufficient clarity on monsoon, pace of economic recovery and a likely delay in the policy rate hike by the US Federal Reserve will open up room for a repo rate cut in September.

Till now, the RBI has cut the repo rate by 125 bps since it first started lowering the rate in January this year. With inflation within target, continued windfall from lower global oil and commodity prices, postponement of the rate hike by the US Fed, and the need to push up pace of domestic demand recovery prompted the RBI move.

The onus is now on the government to remove impediments to transmission while following a prudent fiscal path, and for banks to pass on the rate cut.

The RBI’s policy will remain accommodative but it will maintain caution in terms of demand-side pressures on inflation that could arise from the Seventh Pay Commission payout expected in the next two fiscals.

By CRISIL

Plus the RBI has also set the CPI inflation target at 5% by end 2016-17 and reiterated it at 4% by end 2017-18.

Therefore, the pause from hereon could be a prolonged one unless there is a significant positive surprise on inflation.

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