Reserve Bank's New Chief Delivers Surprise Rate Cut

Reserve Bank's New Chief Delivers Surprise Rate Cut

Reserve Bank's New Chief Delivers Surprise Rate Cut

RBI forecasts GDP growth for FY20 at 7.4 %, cuts repo rates by 25 basis points from 6.5% to 6.25%: The Reserve Bank of India (RBI) on Thursday cut repo rate by 25 basis points from 6.5 per cent to 6.25 per cent. Consequently, the reverse repo rate has also come down by a similar percentage point to 6 percent.

The central bank also changed its monetary policy stance - a key signalling indicator to the markets -to "neutral" from "calibrated tightening".

"On the basis of an assessment of the current and evolving macroeconomic situation at its meeting today, the Monetary Policy Committee (MPC) chose to reduce the policy repo rate under the liquidity adjustment facility (LAF) by 25 basis points from 6.50% to 6.25% with immediate effect", the RBI said in a statement.

Das, in his maiden monetary policy review, has moved away from the usual practice of announcement 2:30 pm. "Investment activity is recovering but supported mainly by public spending on infrastructure", it said, adding that the need is to strengthen private investment activity and buttress private consumption. The repo rate is the rate at which the central bank lends short-term money to the banks.

Developed economies too are altering stance, with the Reserve Bank of Australia governor this week shifting to neutral. As headline inflation is way below target, MPC could have given 50 bps relaxation to industry. The next meeting of the committee is scheduled in April.

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Inflation slowed to an 18-month low of 2.2 percent in December, remaining well below the Reserve Bank of India's medium-term target of 4 per cent.

Four of the six MPC members voted to cut the rates, while all backed the change in stance.

The Central Statistics Office (CSO) in the data released had pegged the growth rates of agricultural, forestry, fishing and mining industry at 5%, of manufacturing, electricity, gas, water supply and other utility services at 6% and the services sector at 8.1% as against the growth estimates of 6.8%, 7.5% and 8.4% of the respective sector.

"Pronab Sen, former principal adviser of Planning Commission, also believes there is a compelling case for a rate cut now". MPC members Viral Acharya and Chetan Ghate voted against a rate cut.

Asked whether banks would reduce rates in response to RBI's signal, Das said he would be meeting the chiefs of banks within the next fortnight and raise the issue of monetary policy transmission. "Going by the guidance, there is room for a further rate cut".

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