Home Market RBI cuts repo rate by 25 bps, stance remains ‘neutral’

RBI cuts repo rate by 25 bps, stance remains ‘neutral’

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NEW DELHI: RBI's monetary policy committee (MPC), led by Governor Shaktikanta Das, on Thursday announced a 25 basis points cut in the short-term lending rate, also known as repo or repurchase rate, in its first bi-monthly rate review of financial year 2019-20. The repo rate now stands at 6 per cent.

This was the second back-to-back rate cut by the six-member MPC ever since Das was appointed Governor. The move made India the only country in Asia to have cut interest rates twice in three months.

The MPC kept the policy stance neutral.

MPC voted 4:2 in favour of the rate cut. Pami Dua, Ravindra Dholakia, Michael Debabrata Patra and Shaktikanta Das voted in favour of the decision to reduce the policy repo rate. Chetan Ghate and Viral Acharya voted to keep the policy rate unchanged.

“GDP in the first half of FY20 may stay in 6.8-7.1 per cent range while the same may jump to 7.3-7.4 per cent in the second half,” the RBI said in a press release.

Consumer price inflation was seen at 2.9-3 per cent in the first six months of FY20, below the RBIs comfort zone of 4 per cent. The central bank sees inflation rising to 3.5-3.8 per cent in the second half, with risks evenly balanced.

HIGHLIGHTS

  • GDP growth for FY20 cut to 7.2 per cent from 7.4%
  • CPI inflation target revised downward to 2.4% from 3%
  • RBI took note of headwinds to Indian economy
  • MPC votes 4-2 in favour of 25 bps rate cut
  • MPC votes 5-1 to keep stance unchanged at 'neutral'
  • MPC's Ghate, Viral Acharya voted for status quo
  • Low Jan-Feb food inflation to have bearing on near-term CPI
  • To form task force on secondary market for corp loans, Das said
  • Fiscal situation at govt level needs careful monitoring: Guv

The rate cut was in line with analysts projections in an ET Now survey, where 90 per cent of the respondents hoped for a 25-basis point rate cut, while the rest has forecast status quo. India's retail inflation for January-February averaged at 2.3 per cent, lower than RBI's inflation forecast of 2.8 per cent for March quarter.

Domestic equity benchmark was benign in its reaction to the RBI move. BSE Sensex traded 50 points down at 38,820. The rupee extended its weakness and was down 43 paise at 68.87. The 10-year bond yield stood at 7.3, up 0.4 per cent.

Analysts said the transmission of the previous rate cut in February did not materialise as liquidity remained tight. Despite the central banks continued open market operations and the dollar-rupee swap, systemic liquidity as of March-end was in deficit at Rs 40,000 crore.

The tightness in liquidity was visible in high credit-deposit ratios and elevated corporate bond spreads.

“The RBI has adopted a very sensible and pragmaticRead More – Source