ET View: A cautious welcome for the repo rate cut

08 February, 2019, 09:42 | Author: Corey Lynch
  • Home auto loans set to be cheaper as RBI Governor Shaktikanta Das cuts interest rates by 0.25

Thursday's cut is welcome news for Prime Minister Narendra Modi's government, which wants to boost lending and lift growth as it faces elections by May. In its budget on February 1, the government doled out cash to farmers and tax cuts to middle-class families, at the cost of a wider fiscal deficit and larger borrowing.

India's new RBI governor Shaktikanta Das "has delivered what the Modi government was hoping for", said Mark Williams, chief Asia economist of Capital Economics, in a note.

The Reserve Bank of India (RBI) reduced Repo rate by 25 basis points, now at 6.25 from 6.5 per cent on the basis of an assessment of the current and evolving macroeconomic situation. The MPC has also chose to change the monetary policy stance from "calibrated tightening" to "neutral".

If inflation remains muted, Das hinted there is more room to cut rates, sounding a markedly more dovish tone from the central bank. It also stayed below RBI's inflation target of 4 per cent for five consecutive months. 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.

The six-member MPC, headed by Reserve Bank of India Governor Shaktikanta Das, began its meeting on Tuesday and announced its decision on Thursday. As headline inflation is way below target, MPC could have given 50 bps relaxation to industry. Retail inflation, measured by y-o- y change in the CPI, declined from 3.4 per cent in October 2018 to 2.2 per cent in December, the lowest print in the last 18 months. The pace has steadily dropped since June's 4.92 percent. The customary post-Budget board meeting was earlier scheduled for February 9 but has now been deferred. He, however, added that the RBI's track record in projection inflation accurately is no different from the experience of global central banks, who have also seen inflation veer off the expected track in recent years.




Economic growth fell to a worse-than-expected 7.1% in the July-September quarter from 8.2%, dragged down by slower consumer spending and farm growth, below analysts forecast for a 7.4% increase.

The six-member monetary policy committee voted 4:2 in favour of the rate cut, while the decision to change policy stance was unanimous.

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.

The decision "restores growth maximisation as a secondary objective of the RBI".

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