Tuesday, 26 March, 2019


RBI cuts repo rate in first policy review under new governor

RBI Policy MPC Cuts Benchmark Rate RBI Governor Emphasises Growth RBI Policy: MPC Cuts Repo Rate by 25 Basis Points to 6.25%
Conrad Doyle | 07 February, 2019, 20:10

Deputy Governor Viral Acharya and another MPC member, Chetan Ghate, voted for status quo in interest rates, while Shaktikanta Das and three others voted for a cut in interest rates.

The rate cut is in line with expectations as retail inflation grew by 2.2% in December its slowest in the last 18 months.

When asked about transmission and banks' reluctance to pass on the rate decreases to borrowers, Das said it is up to the individual banks to take a call on their lending, underlining that the RBI only gives a directional move. This was the first policy under the new Governor Shaktikanta Das.

The RBI had projected the GDP growth for 2018-19 in the December policy at 7.4 per cent (7.2-7.3 per cent in H2) and at 7.5 per cent for H1:2019-20, with risks somewhat to the downside.

The RBI also eased bank lending restrictions for non-banking finance companies and raised the limit on "collateral free" farm loans in an attempt to boost lending to almost 120 million rural households.

"Investment activity is recovering but supported mainly by public spending on infrastructure", the MPC said in a statement, adding there is a need to strengthen private investment and buttress private consumption.

The interest rate cut coupled with the budget sops would provide much needed respite to the borrowers irrespective of whether it is a auto loan, personal loan or home loan.

The committee though flagged external headwinds including trade tensions, and crude oil prices, which though appear well-behaved now.

The inflation rate is estimated at 3.2-3.4% in the first half of the year 2019-20 and 3.9% in the third quarter of 2019-20, he said. This could allow the RBI more elbow room to lower lending rates, eventually bringing down borrowing costs for individuals and corporate houses.

These include the volatile vegetable prices that could reverse upwards, uncertainty in crude oil prices despite the drop in recent months, heightening global trade tensions, the unusual spike in health and education prices, volatility in financial markets, monsoon rains in the coming summer months and its impact on food prices, and lastly, the union budget proposals' effect on the real sector.

The surprise 25 basis points rate cut to 6.25 per cent is a measure to broad base credit growth across all the sectors of the economy that's gathering more steam now, the governor said. "Growth in rural wages moderated in October", RBI said.

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

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