Monetary policy: RBI cuts repo rate by 50 bps to boost economy

By: | Updated: September 29, 2015 5:28 PM

RBI monetary policy: Reserve Bank of India today cut repo rate by 0.50 per cent and relaxed norms for home loan seekers.

rbi rate cutRBI monetary policy: Reserve Bank of India today cut repo rate by 0.50 per cent and relaxed norms for home loan seekers. (Express Photo by Ganesh Shirsekar)

In a big boost to the economy and borrowers, the Reserve Bank of India today cut repo rate by 0.50 per cent and relaxed norms for home loan seekers.

In its monetary policy review, RBI reduced the repo rate by 50 basis points from 7.25 per cent to 6.75 per cent with immediate effect.

The central bank cut the GDP forecast to 7.4 per cent for the current fiscal to 7.6 per cent while projecting retail inflation at 5.8 per cent for January.

RBI kept the cash reserve ratio (CRR), portion of deposits mandatorily kept by banks with the central bank, unchanged at 4 per cent.

Consequently, the reverse repo rate adjusted to 5.75 per cent, and the marginal standing facility (MSF) rate and the Bank Rate to 7.75 per cent.

RBI Governor Raghuram Rajan said: “Further monetary policy accommodation will be conditioned by the abating of recent inflationary pressures, the full monsoon outturn, possible Federal Reserve actions and greater transmission of its front-loaded past actions.”

Looking forward, he said inflation is likely to go up from September for a few months as favourable base effects reverse.

“The outlook for food inflation could improve if the increase in sown area translates into higher production.

Here is Sunil Jain, Managing Editor of The Financial Express’ take on RBI rate cut:

Moderate increases in minimum support prices should keep cereal inflation muted, while subdued international food price inflation should continue to put downward pressure on the prices of sugar and edible oil, and food inflation more generally,” he said.

Taking all this into consideration, he said, inflation is expected to reach 5.8 per cent in January 2016, a shade lower than the August projection.

In a bid to give boost to housing sector, the RBI proposed to reduce the risk weights on affordable housing applicable to lower value but well collateralised individual housing loans.

At present, the minimum risk weight applicable on individual housing loans is 50 per cent, it said.

Rajan also affirmed RBI’s commitment to be “accommodative” in the future even after today’s “front loaded” action.

“The bulk of our conditions for further accommodation have been met,” Rajan said in the fourth bi-monthly review of the monetary policy in the current fiscal.

The repo rate, at which RBI lends to the system, has now come down 6.75 per cent, the reverse repo rate at which it accepts banks excess liquidity will be 5.75 per cent, while the cash reserve ratio has been kept unchanged at 4 per cent.

This is the fourth policy rate cut by Rajan this year, and takes up the cumulative rate cuts to 1.25 per cent. The RBI has been under pressure from various quarters to give a fillip to the sagging growth by a rate cut, and itself acknowledged the need to do so when it cut its growth projection by 0.2 per cent to 7.4 per cent for the fiscal.

“Continuing policy implementation, structural reforms and corporate actions leading to higher productivity will be the primary impetus for sustainable growth,” Rajan said.

He made it clear that the RBI has “front-loaded policy action by a reduction in the policy rate by 0.50 per cent”, and this action shall ensure that the real interest rates will continue to be in the 1.5-2 per cent band.

Rajan reiterated the need for banks to pass the benefits of the RBI actions to their lending rates and added that with this cut, the focus of the monetary policy will now shift to working with the government to remove impediments to pass a bulk of the cumulative 1.25 per cent cuts to borrowers.

Banks have so far passed only an average of 0.30 per cent to the borrowers as against RBI’s 0.75 per cent cut and blame the delays in repricing of deposits for the lag. He added that deposit rates have “reduced significantly” and further transmission “is possible”.

The central bank is targeting to get headline inflation at 6 per cent by January 2016 and Rajan said it will reach 5.8 per cent by then. In the way forward, the focus will now shift to getting the number down to 5 per cent by FY17.

Largely due to the base effects, the number had come at 3.66 per cent in August.

Apart from the rate action, Rajan introduced a slew of actions on the financial markets front, starting with setting the foreign portfolio investment limits in rupee terms, rather than in dollars.

FPI investments in government bonds will be increased in phases to 5 per cent of the outstanding stock by March 2018, which can bring in an additional of Rs 1,20,000 crore, over and above the existing limit of Rs 1,53,500 crore, Rajan said.

A majority of analysts were expecting Rajan to cut rates at the policy review, largely because of inflation being under control, and possibilities of it staying low in the immediate future on compressed commodity prices. However, more than the rate action, it was the guidance in the future stance, which the market was watching the most.

The Finance Ministry had also been building pressure on the RBI to cut rates, which will serve as a booster for the economy, where the GDP expansion has slipped to 7 per cent for the June quarter.

Citing wholesale price-based inflation continuing to be in the negative zone, Chief Economic Advisor Arvind Subramaniam had said the economy run the risk of deflation as well.

However, in its Monetary Policy Report, RBI said concerns around deflation are “overstated” and an “array of facts” like the sequential pick-up in growth can be presented to counter the argument.

“The prescription is that monetary policy should act aggressively to pre-empt deflation,” it said, adding that the government will also have to work hard to push growth.

At 3.66 per cent in August, the consumer price inflation is within RBI’s comfort zone, given its stated target of keeping it at 6 per cent by January 2016.

A week ahead of the review, Rajan had given mixed signals of the stance he will be taking at the review, saying the inflation is low due to base effects — it was very high same time last year — and also flagged worries on inflation expectations in the economy, which continue to be very high.

The comments had come a day after US Federal Reserve decided to delay it’s rate hike, further fuelling expectations of a rate cut in India.

Apart from the US Fed’s actions, the 13 per cent shortfall in monsoon till now, which can impact inflation going forward, is another key factor.

The RBI shifted its stance in January this year with the first rate cut, after picking up signals of ebbing in the inflation trajectory.

Following the rate cut, the benchmark BSE Sensex was in green briefly but subsequently slipped into the red. The Sensex was trading 116 points down from yesterday’s close just half-an-hour after the announcement.

This is the fourth policy rate cut by Rajan this year, and takes up the cumulative rate cuts to 1.25 per cent.

The RBI has been under pressure from various quarters to give a fillip to the sagging growth by a rate cut, and itself acknowledged the need to do so when it cut its growth projection by 0.2 per cent.

The Finance Ministry had also been building pressure on the RBI to cut rates, which will serve as a booster for the economy, where the GDP expansion has slipped to 7 per cent for the June quarter.

Rajan reiterated the need for banks to pass the benefits of the RBI actions to their lending rates and added that with this cut, the focus of the monetary policy will now shift to working with the government to remove impediments to pass a bulk of the cumulative 1.25 per cent cuts to borrowers.

It can be noted that banks have passed only an average of 0.30 per cent to the borrowers as against RBI’s 0.75 per cent cut to borrowers and blame the delays in repricing of deposits for the lag.

He added that deposit rates have “reduced significantly” and further transmission “is possible”.

As far as inflation is concerned, he said the focus will now shift to getting the number down to 5 per cent by FY17.

Largely due to the base effects, the number had come at 3.66 per cent in August.

Apart from the rate action, Rajan today introduced a slew of actions on the financial markets front, starting with setting the foreign portfolio investment limits in rupee terms, rather than in dollars.

He also said that FPI investments in government bonds will be increased in phases to 5 per cent of the outstanding stock by March 2018, which can bring in an additional Rs 1.2 trillion (Rs 1.2 lakh crore), over and above the existing limit of Rs 1.5 trillion (Rs 1.5 lakh crore).

Get live Stock Prices from BSE and NSE and latest NAV, portfolio of Mutual Funds, calculate your tax by Income Tax Calculator, know market’s Top Gainers, Top Losers & Best Equity Funds. Like us on Facebook and follow us on Twitter.

Switch to Hindi Edition