RBI rate cut a positive move, will revive investment cycle: Arun Jaitley

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New Delhi | Published: January 16, 2015 2:19:55 AM

Finance minister Arun Jaitley hailed the surprise 25-bps repo rate cut by the RBI...

Finance minister Arun Jaitley hailed the surprise 25-bps repo rate cut by the RBI on Thursday as a shift in its tight monetary policy stance, which would leave more money in the hands of consumers for spending and help revive the investment cycle.

Minister of state for finance Jayant Sinha and finance ministry’s chief economic adviser Arvind Subramanian, too, welcomed the move as a vindication of the government’s efforts to achieve higher economic growth without stoking inflation.

“It is a positive development for the Indian economy and will certainly help in reviving the investment cycle the government is trying to restore,” said Jaitley.

The finance ministry issued a statement later in the day saying the rate cut was consistent with the strong disinflationary trends and would provide a fillip to the economy directly by increasing the private sector’s ability and willingness to spend.

“It should also help indirectly by improving the balance sheet of the corporate sector and banks, facilitating an increase in the demand for and supply of credit,” said the ministry. The ministry said that, along with other policy actions already taken by the government and those that are under consideration, the rate cut would help revive investment and realise the country’s medium-term growth potential.

The central bank cut the repo rate to 7.75% from 8%. Consequently, the reverse repo adjusted to 6.75%.The RBI indicated that disinflationary developments, along with the government’s resolve to stick to its fiscal deficit target, provided enough headroom to cut rates.

Industry chamber Ficci said it expects further cuts in the policy rate. Rating agency Crisil said inflation, which has fallen below the RBI’s expected trajectory in recent months, to average 5.8% in 2015-16 and that it expects the central bank to cut rates by 50-75 bps over the next fiscal.

“It (the rate cut) will provide some fillip to the economy, both directly and indirectly,” Subramanian told a television channel.

Helped by plunging global oil prices, wholesale price index for December rose just 0.11% after staying flat in November. Consumer price inflation, meanwhile, rose to 5% in December.

Sinha said the RBI decision was driven by declines in both actual and expected inflation, and not by any concerns that India’s economic recovery was losing traction.

Sinha said the signs were very positive that economic momentum has rebounded and that it is likely to witness a significant acceleration in growth. “The goal is to achieve faster growth which is non-inflationary,” he said.

Subramanian said lower oil prices, weak demand and slowing rural wages are expected to keep inflation in check, opening up a window for more rate cuts. Subramanian said the strong disinflation trend going forward will leave room for possibly more monetary policy easing.

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