RBI Policy: MPC cuts repo rate by 25 basis points to 6.25%

RBI Policy MPC Cuts Benchmark Rate RBI Governor Emphasises Growth

More importantly, the MPC has spelt out the change in policy stance to "neutral" from what was called "calibrated tightening so far".

Most respondents expected the central bank to only change the stance, to neutral. "Investment activity is recovering but supported mainly by public spending on infrastructure". In its Febriary 5 report, news agency Reuters had said a softer stance would bode well for Prime Minister Narendra Modi's government, which wants to boost lending and lift growth as it faces elections by May.

There have been signs that Modi's support has crumbled in parts of a countryside that supported his Hindu nationalist Bharatiya Janata Party (BJP) in the last election in 2014. Chetan Ghate and Viral V Acharya voted to keep the policy rate unchanged.

The rate cut comes after the government introduced a budget last week that also provided stimulus for the economy, including handouts for farmers and modest tax cuts for the lower middle class.

The repo rate cut, coming after a gap of 18 months, will nudge banks to cut interest rates on loans for borrowers and provide a stimulus for demand in the economy. The Federal Reserve has changed direction, and now many analysts expect no USA rate hikes this year, after four in 2018.

The 6-member Monetary Policy Committee (MPC), headed by Patel, reduced repo rate or the short term rate at which central bank lends to banks, to 6.25 percent. The rupee weakened to 71.69 to the dollar immediately after the announcement but did strengthen to 71.42 soon.

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The NSE index was up 0.04 percent at 11068.05 while the 10-year benchmark government bond yield fell to 7.51 percent from Wednesday's close of 7.56 percent. This was the first policy under the new Governor Shaktikanta Das.

The RBI governor said that they expect GDP growth rate to be at 7.4 per cent in fiscal 2019-20 which is up from 7.2 per cent estimated for financial year 2018-19 by central statistical organization.

"Over the next 12 months, if we see that inflation remains at 3.9 per cent, maximum of 4 per cent or below, then I think there is room to act", Das said. Past three governors have been blaming the banks for not passing on their rate cuts to customers, thus offsetting the efforts of the monetary authority to lower interest cost for the economy.

Not surprisingly, the RBI's off-the-mark inflation projections drew criticism, with some questioning whether the 50 basis points in rate hikes announced in 2018 were necessary.

The MPC announced on Thursday that it had trimmed its economic growth forecast to 7.2-7.4 percent for the period from April-September this year from its previous 7.5 percent estimate.

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