After a surprise rate cut, Shaktikanta Das promises more if inflation falls

RBI Policy MPC Cuts Benchmark Rate RBI Governor Emphasises Growth

RBI Policy MPC Cuts Benchmark Rate RBI Governor Emphasises Growth

While four members of the MPC including Das voted for a rate cut, RBI deputy governor Viral Acharya and independent member Chetan Ghate, a professor at the Indian Statistical Institute were in favour of maintaining a status quo on rates. The repo rate at which banks borrow from the central bank now stands at 6.25 per cent from 6.5 per cent.

The RBI raised rates twice a year ago over concerns about rising prices but with inflation now at an 18-month low the bank said it was time to opt for a reduction.

Mark Williams, Chief Asia Economist of Capital Economics in London, said there was a growing perception that RBI had allowed its focus on controlling inflation to slip, and therefore higher inflation and higher interest rates were likely over the long term.

The MPC meeting - the first for RBI Governor Shaktikanta Das - also made a decision to lower India's inflation projection for April-September to 3.2-3.4% from the 3.8-4.2% seen in December. The central bank also announced that the limit of collateral-free agriculture loans was being raised from Rs 1 lakh to Rs 1.6 lakh. However, it remains to be seen if the banks will quickly pass on the benefits of the rate cut to the borrowers.

"Investment activity is recovering but supported mainly by public spending on infrastructure", news agency Reuters reported quoting the MPC. "The need is to strengthen private investment activity and buttress private consumption", the policy said.

"First, aggregate bank credit and overall financial flows to the commercial sector continue to be strong, but are yet to be broad-based".

Other uncertainties flagged by the MPC include uncertain monsoons, volatile vegetable prices, hazy oil price outlook, further heightening of trade tensions and geopolitical uncertainties, the unusual spike in the prices of health and education, and volatile financial markets.

"Headline inflation is expected to remain contained below or at its target of 4%".

"On the basis of an assessment of the current and evolving macroeconomic situation at its meeting today, the Monetary Policy Committee (MPC) made a decision to reduce the policy repo rate under the liquidity adjustment facility (LAF) by 25 basis points from 6.50% to 6.25% with immediate effect", the RBI said in a statement. "Growth in rural wages moderated in October", RBI said.

India's central bank on Thursday unexpectedly lowered interest rates and, as anticipated, shifted its stance to "neutral" from "calibrated tightening" to boost a slowing economy after a sharp fall in the inflation rate.

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