RBI pulls off surprise; cuts repo rates by 25 bps

The Reserve Bank of India (RBI) on Thursday, pulled off a surprise by reducing the repo rate to 6.25% from the existing 6.5%. The Reserve Bank also changed the stance from calibrated tightening to neutral. However, the bank has lowered the growth of the target to 7.2% from existing 7.4%.

"These decisions are in consonance with the objective of achieving the medium-term target for consumer price index (CPI) inflation of 4% within a band of +/- 2%, while supporting growth," the central bank said.

The move comes despite the economists projecting the bank to hold on to the rates on back of the inflationary budget. The move is expected to lower the cost of credit in the economy.

The RBI has projected that the headline inflation will remain soft in the near term reflecting the current low level of inflation and the benign food inflation outlook. Beyond the near term, some uncertainties warrant careful monitoring. First, vegetable prices have been volatile in the recent period; reversal in vegetable prices could impart upside risk to the food inflation trajectory.

Secondly, the oil price outlook continues to be hazy. Thirdly, a further heightening of trade tensions and geo-political uncertainties could also weigh on global growth prospects, dampening global demand and softening global commodity prices, especially oil prices.

Fourthly, the unusual spike in the prices of health and education needs to be closely watched.

Fifthly, financial markets remain volatile. Sixthly, the monsoon outcome is assumed to be normal; any spatial or temporal variation in rainfall may alter the food inflation outlook.

Finally, several proposals in the union budget for 2019-20 are likely to boost aggregate demand by raising disposable incomes, but the full effect of some of the measures is likely to materialise over a period of time, the central bank said.

The MPC notes that the output gap has opened up modestly as actual output has inched lower than potential. Investment activity is recovering but supported mainly by public spending on infrastructure. The need is to strengthen private investment activity and buttress private consumption.

Against this backdrop, the MPC decided to change the stance of monetary policy from calibrated tightening to neutral and to reduce the policy repo rate by 25 basis points, the RBI statement said.

Unanimous decisioin

The decision to change the monetary policy stance was unanimous. As regards the reduction in the policy repo rate, Dr Ravindra H. Dholakia, Dr Pami Dua, Dr Michael Debabrata Patra and Shri Shaktikanta Das voted in favour of the decision. Dr Chetan Ghate and Dr Viral V Acharya voted to keep the policy rate unchanged. The MPC reiterates its commitment to achieving the medium-term target for headline inflation of 4 per cent on a durable basis. The minutes of the MPC’s meeting will be published by February 21, 2019. The next meeting of the MPC is scheduled from April 2 to 4, 2019.