Reserve Bank's New Chief Delivers Surprise Rate Cut


The Reserve Bank of India (RBI) will probably change its monetary policy stance to "neutral" from "calibrated tightening" on Thursday and keep interest rates on hold. Consequently, the reverse repo rate has also come down by a similar percentage point to 6 percent.

Mumbai: The Reserve Bank of India (RBI) on Thursday unexpectedly lowered interest rates and as anticipated, shifted its stance to "neutral" from "calibrated tightening" to boost a slowing economy after a sharp fall in the inflation rate.

But the decision, in a split vote that saw four members of the MPC vote in favour of a 25 basis point cut in the repo rate, deserves a more cautious welcome. The RBI has thus cut rate for the first time in 17 months since August 2017.

The repo rate is the rate at which the Reserve Bank lends short-term money to the banks, while the reserve repo rate is the rate at which the central bank borrows money from commercial banks. According to Acharya, the outlook for prices had changed in December itself following a crash in oil prices, but the central bank did not change the stance, choosing to move in small steps.

Commenting on the RBI rate cut, Ankur Dhawan- Chief Investment, said "Industry was expecting a bigger rate cut than announced". It also stayed below RBI's inflation target of 4 per cent for five consecutive months. As headline inflation is way below target, MPC could have given 50 bps relaxation to industry.

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At the committee's meeting, the first after Shaktikanta Das took over as the central bank's Governor, also changed its stance to "neutral" from the earlier "calibrated tightening".

The RBI revised the projection for Consumer Price Index inflation downward to 2.8% in the fourth quarter of 2018-'19 financial year.Retail inflation declined from 3.4% in October 2019 to 2.2% in December, which the RBI said was the lowest in the last 18 months.

Emboldened by a slowdown in inflation, the MPC under the new governor showed more concern about economic growth risks, paving the way for more rate cuts.

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. The governor also indicated that there was scope for further rate cuts this year if prices do not rise.