RBI monetary policy review: In a big boost to the Indian economy and loan takers, the Reserve Bank of India (RBI) Governor Raghuram Rajan today cut repo rate by 50 bps (0.50 per cent) and relaxed norms for home loan seekers. RBI reduced the key rate (repo) by 50 basis points from 7.25 per cent to 6.75 per cent with immediate effect. 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. 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." (Express photo by Prashant Nadkar)

RBI monetary policy: Reserve Bank of India keeps CRR unchanged at 4 per cent.

Raghuram 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. 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.

RBI monetary policy: Central bank cuts FY16 real GDP growth estimate to 7.4%; expects pick up towards the latter part of the fiscal.

This is the fourth policy rate cut by Raghuram 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.

RBI monetary policy: Raghuram Rajan-led RBI says inflation is expected to reach 5.8% in January 2016.

Raghuram 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".

RBI monetary policy: Inflation to stay below January 2016 target of 6% in FY16; will average 5.5% for FY17.

Apart from the rate action, Raghuram 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.

RBI monetary policy: Central bank says limits for FPI investment in debt securities will be henceforth announced or fixed in rupee terms.

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.

RBI monetary policy: Limit for FPI investment in govt bonds to be increased in phases to 5% of outstanding stock by March 2018: RBI

The chorus for a rate cut had grown following headline inflation dipping due to lower commodity prices and industrial output yet to pick up pace. Guv Raghuram Rajan had to balance these with concerns of a possible spike in food prices due to weak monsoon rains or a likely rise in global oil prices.

RBI monetary policy: Central bank to issue final guidelines on base rate computation by November-end.

Another aspect Guv Raghuram Rajan also had to look at was the impact of an anticipated US interest rate increase by the end of the year -- the first in nine years -- on emerging markets like India will also weigh on his mind in deciding on the monetary action. Most bankers had felt that benign inflation and status quo by the US Fed have given room for RBI to cut repo rate by at least 0.25 per cent.

RBI monetary policy: Central bank to continue to provide liquidity under overnight repos at 0.25 per cent of bank-wise net demand and time liability (NDTL) at the LAF repo rate and liquidity under 14-day term repos as well as longer term repos of up to 0.75 per cent of NDTL of the banking system through auctions.

RBI monetary policy: Central bank to continue with daily variable rate repos and reverse repos to smooth liquidity

The RBI Governor has been under pressure from the Finance Ministry as well as corporate executives to cut interest rate to spur recovery and mitigate the impact of slowing China on India. Even Finance Minister Arun Jaitley last week asserted that common sense says interest rates should come down.