RBI monetary policy panel cuts interest rate by 25 basis points

Mumbai: The Reserve Bank of India (RBI) on Tuesday announced a 25 basis points (bps) cut in repo rate as it believes that food inflation momentum has moderated and upside risks to the March inflation target are lower than at the time of the August policy.

The policy announcement underlines the central bank’s shifting priorities as it tries to prop up growth as inflation remains under control because of a normal monsoon.

All six members of the newly constituted monetary policy panel voted in favour of a rate cut.

The repo rate, which is the signalling rate now, stands at 6.25%. A basis point is 0.01%.

A Mint poll of 10 economists had said that the market was split in its expectation from the RBI. Five participants had predicted a rate cut of at least 25 bps, of which only one member saying that the repo rate may be cut by 50 bps. The remaining participants had said that they expected the central bank to hold rates in this policy and wait for more macroeconomic data to emerge, before reducing interest rates in the later part of the year.

“The Committee expects that the strong improvement in sowing, along with supply management measures, will improve the food inflation outlook. It notes that the sharp drop in inflation reflects a downward shift in the momentum of food inflation – which holds the key to future inflation outcomes – rather than merely the statistical effects of a favourable base effect,” said a statement.

“The government has announced several measures to cool food inflation pressures, especially with regard to pulses. These measures should help in moderating the momentum of food inflation in the months ahead,” it added.

As the festival season begins banks are expected to pass on this rate cut to their borrowers in the form of a reduction in lending rates. Some large lenders like State Bank of India and ICICI Bank have been bringing down their marginal cost lending rate (MCLR) over the last few weeks as the expectation of a low interest rate regime increases.

This is the first monetary policy where the rate decision has been taken by a six-member monetary policy committee (MPC) which came in to existence last month. The committee includes the central bank’s chief, deputy governor R. Gandhi, executive director Michael Patra and three government nominees which includes Chetan Ghate, Pami Dua and Ravindra Dholakia.

The MPC’s decision to support growth comes from the comfort that consumer price inflation (CPI) is finally stabilising around the comfort zone after two months of consistent hardening.

Retail inflation, which had quickened to 6.07% in July owing to a spike in food prices, slowed sharply to 5.05% in August driven by a drop in vegetable prices. About 90 bps of the 102 bps month-on-month fall in CPI was due to vegetable prices.

At the same time, RBI noted that there are some upside risks to inflation if even lower than a few months ago.

“The Committee took note of potential cost push pressures that may emerge, including the 7th pay commission award on house rent allowances, and the increase in minimum wages with possible spillovers through minimum support prices. The fuller play of these factors will need vigilance to prevent a generalised cost spiral from taking root,” the statement said.

At 2.30 pm, the rupee was trading at 66.41, up 0.27% from its previous close of 66.58. The 10-year benchmark bond yield was trading at 6.778% compared to its previous close of 6.773%. India’s benchmark Sensex rose 0.52% to 28,390.66 points.