The Reserve Bank of India cut repo rate on Wednesday by 25 basis points to 6% in its latest credit and monetary policy review as was expected, reducing the key policy rates for the first time since October 2016, as falling inflation provided it room for monetary easing. The revised repo rate at 6% is the lowest in six-and-a-half years since November 2010.
The central bank also kept the policy stance ‘neutral’ but maintained a watchful eye on inflation, which it said will be watched for a rise later this year. This is the second time when the six-member Monetary Policy Committee was not unanimous in the decision, with four of the members, including Governor Urjit Patel, voting in favour of a 25 basis points cut, one member voting for a 50 bps cut, and one voting for status quo.
Here are the key takeaways from RBI’s bi-monthly Monetary and Credit Policy for August 2017.
- Key policy rates have been cut by 25 basis points. Repo rate has been cut to 6% — the lowest in six and a half years. This is the first policy rate cut since October 2016. Accordingly, the revised reverse repo rate and the marginal standing facility rate will now stand at 5.75% and 6.25%. RBI, in its last policy in June 2017, had narrowed the policy rate corridor by 50 basis points by raising the reverse repo rate and reducing the marginal standing facility rate.
- RBI kept its medium term consumer inflation target at 4%, and said that the decision of the MPC is consistent with a neutral stance of monetary policy. It said the decision was “in consonance with the objective of achieving the medium-term target for consumer price index (CPI) inflation of 4% within a band of +/- 2%, while supporting growth.
- RBI expects inflation to rise from current lows going ahead. Governor Urjit Patel said that farm loan waiver, GST, pay hikes are risks to inflation. He also said that excluding the impact of HRA, the headline CPI may be slightly above 4%. Core inflation has fallen significantly over past three months, he said.
- RBI said that it maintained a ‘neutral’ stance as it believes that the inflation is likely to rise later this year from the current lows, as the base effect fades. “The MPC (Monetary Policy Committee) observed that while inflation has fallen to a historic low, a conclusive segregation of transitory and structural factors driving the disinflation is still elusive… The MPC will continue monitoring movements in inflation to ascertain if recent soft readings are transient or if a more durable disinflation is underway,” RBI said.
- This is the second time when the Monetary Policy Committee was not unanimous in its decision to cut rates. Four of the MPC members voted for a 25 basis points rate cut. Dr Chetan Ghate, Dr Pami Dua, Dr Viral V Acharya and Dr Urjit R Patel were in favour of the monetary policy decision, while Dr Ravindra H Dholakia voted for a policy rate reduction of 50 basis points and Dr Michael Debabrata Patra voted for status quo. The minutes of the MPC’s meeting will be published by August 16, 2017.
- RBI Governor Urjit Patel said that given the current liquidity conditions and monetary easing there is scope for banks to reduce lending rates in the segments which have not benefited. He said that the rate transmission has been much stronger in new lending, though he added that the rate transmission was not guaranteed. Deputy Governor Viral Acharya said that the marginal cost loan rate experience has not been satisfactory, and that a task force to review current state of credit data.
- Governor Urjit Patel said there is an urgent need to reinvigorate private investment and remove infrastructure bottlenecks. He added that the MPC (Monetary Policy Committee) had noted that underlying growth in industry and services is weakening slightly. He also said that there is a need to provide a big thrust to Pradhan Mantri Awas Yojana for housing needs of all.
- With regard to the ongoing problem on the non-performing assets, Governor Patel said that RBI and the government is working in close coordination to resolve large stressed corporate borrowers. The central bank and the government is also working in close co-ordination to recapitalise PSU banks within fiscal deficit target, he said. Deputy Governor Viral Acharya said that addressing twin balance sheet issue is the top priority.
- Deputy Governor Viral Acharya said RBI will continue to monitor currency in circulation closely, and will use tools mentioned in April policy in liquidity management. He added that RBI intends not to destabilise or shock markets on OMO sales, hinting at a calibrated sale of government securities in open market operations.