5 reasons why RBI slashed interest rate by 50 bps today in its monetary policy review

By: | Updated: September 29, 2015 5:36 PM

The Reserve Bank of India on Tuesday cut its key repo rate by a bigger-than-expected 50 basis points to 6.75 per cent on Tuesday, with inflation running at record lows and the economy in danger of slowing down.

Reserve Bank of IndiaMonetary policy: The Reserve Bank on Tuesday cut interest rate by 0.50 per cent and relaxed norms for home loan seekers.(Photo: Reuters)

The Reserve Bank of India on Tuesday cut its key repo rate by a bigger-than-expected 50 basis points to 6.75 per cent on Tuesday, with inflation running at record lows and the economy in danger of slowing down.

“The policy was loaded with surprises, especially for the bond market. Few in the market expected a 50 bps cut in today’s policy. And it doesn’t end there, the RBIs inflation forecast of 4.75% for Jan-Mar 2017 quarter suggests further room for rate cuts in CY 2016, ” Murthy Nagarajan, Head – Fixed Income, Quantum AMC, said.

A Reuters poll last week showed only one out of 51 economists had expected a 50 basis points rate cut, while 45 had expected a 25 bps cut.

The central bank also revised downwards its real GDP forecast for 2015-16 to 7.4 per cent from earlier expectation of 7.6 per cent, saying that growth is expected to pick up in the latter part of the fiscal

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

5 reasons why RBI cuts repo rate in its fourth bi-monthly monetary policy.

1) Falling commodity prices globally allowed Reserve Bank of India to cut interest rateby 50 basis point cut. The central bank said that China currency devaluation, equity prices, commodities and currencies have fallen sharply. Capital flight from emerging market economies (EMEs) into mature bond markets has pushed down developed market yields, and risk spreads across asset classes have widened. Although volatility ebbed in early September and capital flows returned cautiously to some EMEs, sentiment in financial markets remains fragile.

2) The September 17 decision of the Federal Open Market Committee to stay on hold in response to global conditions and weak domestic inflation lifted financial markets briefly, but overall financial conditions are yet to stabilise.
“Even with some hike the US Federal Reserve rates likely later this year, there is head room for the RBI to remain accommodative as structural factors driving inflation in India have abated and global deflationary forces remain strong. Overall, we continue to expect downward bias in interest rates in India, which should act as one of the catalysts for investment revival, going hand-in-hand with favourable government measures, ” Angel Broking CMD Dinesh Thakkar said.

3) The central bank said although a tentative economic recovery is underway, but the rate cut will help economy to become more stronger. In agriculture, sown area has expanded modestly from a year ago, reflecting the timely and robust onset of the monsoon in June, but the southwest monsoon is currently deficient by 14 per cent – with production-weighted rainfall deficiency at 20 per cent. Allied farm activities, which are more insulated from the monsoon, remain resilient and could partly offset the effects of adverse weather on crop production. Rural demand, however, remains subdued as reflected in still shrinking tractor and two-wheeler sales.

4) Since the last monetary policy review in August, external demand conditions have turned weaker, suggesting a more persistent drag from lower exports and cheaper imports due to global overcapacity. This contributes to continuing domestic capacity under-utilisation, decelerating new orders and a rising ratio of finished goods inventories to sales. In the services sector, construction activity is weakening as reflected in low demand for cement and the large inventory of unsold residential houses in some localities.

5) Headline consumer price index (CPI) inflation reached its lowest level in August since November 2014. The ebb of inflation in the year so far is due to a combination of low month-on-month increases in prices and favourable base effects. Overall year-on-year food inflation dropped sharply, led by vegetables and sugar. Cereal inflation moderated steadily during April-August, but price pressures in respect of pulses and onions remained elevated. “The Reserve Bank of India’s (RBI) decision to cut interest rates by 50 basis points amidst stable inflation indicators, augers well for steady economic growth and is expected to bolster investment demand. With the latest interest revision, the RBI has cut repo rate by a total of 125 basis points this year to a four-year low that should act as a catalyst to revive sentiments in the real estate sector,” said  Sanjay Dutt, Managing Director, India, Cushman & Wakefield.

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