The Reserve Bank of India (RBI) on Wednesday cut the repo rate by 25 basis points to 6 per cent pointing to the sharp fall in inflation in recent times. However, the central bank wasn’t sure if this fall in inflation is durable and retained a neutral stance for monetary policy. The Finance Ministry hailed RBI’s decision to cut key policy rate by 0.25 per cent to achieve sustained growth. The RBI, in its third bi-monthly monetary policy of the fiscal, cut the repo rate after a gap of nearly 10 months. The new repo rate at 6 per cent is the lowest in six-and-a-half years. The last rate cut took place in October 2016. Commenting on the rate cut, RBI Governor Urjit Patel said the central bank has maintained the economic growth projection at 7.3 per cent for the current fiscal. Patel also attributed fall in inflation in the last three months to implementation of GST and good monsoon.
Economic Affairs Secretary Subhash Chandra Garg also welcomed the rate cut saying: “We welcome the 25 basis points cut in the repo rate as an important step necessary to converge towards the appropriate real monetary conditions for sustained growth consistent with India’s potential and for stable, moderate inflation.” Commenting on the rate of price rise, Patel said: “The MPC observed that while inflation has fallen to a historic low, a conclusive segregation of transitory and structural factors driving the disinflation is still elusive.
Repo rate cut: Here are the top developments
1. Reverse repo rate cut by 0.25 per cent to 5.75 per cent.
2. The government had been pitching for a rate cut to boost economic growth amid retail inflation falling to a historic low of 1.54 per cent in June.
3. The Monetary Policy Committee (MPC) has decided to keep the policy stance neutral and to watch incoming data with a view to keeping headline inflation close to 4 per cent.
4. The RBI said it is working in close coordination with the government to resolve large stressed corporate borrowings and recapitalise public sector banks.
5. The stock market, however, didn’t react to the rate cut on expected lines. Despite factoring in the repo rate cut, it declined. While the BSE index Sensex slipped from record high to end 98.43 points lower at 32,476.74, NSE’s Nifty fell 33.15 points to 10,081.50.
6. The banking sector in India is reeling under Rs 8 lakh crore of non performing assets (NPAs) or bad loans, of which PSU banks alone account for over Rs 6 lakh crore.
7. Focus on keeping headline inflation close to 4 per cent on durable basis.
8. Some risks to inflation have reduced or not materialised.
9. Growth forecast unchanged at 7.3 per cent for the current fiscal.
10. Pushes for reinvigorating private investments, clearing infra bottlenecks and providing big thrust to Pradhan Mantri Awas Yojana (PMAY).
11. Forex reserves at USD 392.9 billion as on July 28.
12. Four members of Monetary Policy Committee voted in favour of 0.25 pc rate cut.
13. Farm loan waivers by states may result in fiscal slippages, undermine public spending quality.
14. Government, RBI working to resolve large NPAs and recapitalise public sector banks.
15. High levels of stress in twin balance sheets – banks and corporations – are likely to deter new investment.
16. Next MPC meeting on October 3 and 4, 2017.