The Reserve Bank of India cut repo rate on Wednesday by 25 basis points to 6% in its latest credit and monetary policy review, reducing the key policy rates for the first time in this fiscal year, as was expected given the constantly falling inflation. 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’ with an eye on inflation, which it said will be watched for a rise later this year. Accordingly, the revised reverse repo rate and the marginal standing facility rate will now stand at 5.75% and 6.25%, respectively, the RBI said in a statement.
Earlier in June, in its last credit and monetary policy review, RBI had kept the repo rate unchanged at 6.25% in line with the expectations, choosing to wait to see the behaviour of inflation and avoiding a ‘premature’ action.
“The decision of the MPC is consistent with a neutral stance of monetary policy in consonance with the objective of achieving the medium-term target for consumer price index (CPI) inflation of 4 per cent within a band of +/- 2 per cent, while supporting growth,” RBI said in its policy statement on Wednesday.
RBI keeps its eye on inflation
“The MPC 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,” it added.
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.
A slump in food prices sent India’s June CPI inflation (consumer inflation) to an over five-year low of 1.54 — well below the RBI’s 4% target and its projection of 2%-3.5% for April-September. Falling inflation had sparked pressure from the government to cut rates in the policy on Wednesday and signal further easing later this year. RBI had raised concerns that inflation could accelerate due to a seasonal rebound in food prices and factors such as planned pay hikes for government employees.
Government roots for supporting growth
Meanwhile, the government is rooting for a rate cut to boost falling GDP growth rate. India’s economic growth slowed down to a 3-year low of 7.1% in 2016-17 due to the effect of demonetisation and lost the tag of world’s fastest growing major economy tag to China. The data released by the Central Statistics Office (CSO) earlier this year revealed that the GDP (gross domestic product) growth for the January-March quarter slowed to 6.1% while GDP growth for the full financial year 2016-17 stood at a three-year low of 7.1% due to the impact of demonetisation
India’s GDP growth was 8 percent in 2015-16 and 7.5 per cent in the previous year. China had reported a growth of 6.9 percent in the January-March quarter of 2017. India had for the first time outpaced China in GDP growth rate in 2015. In its last four policy meetings respectively, RBI kept key policy rates unchanged; cut policy rates by 25 basis points; kept rates unchanged; changed its policy stance to ‘neutral’ from ‘accommodative’.