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RBI takes sharp U-turn, lowers repo by 25 bps in first cut since Aug 2017

Staff reporter, New Delhi
07/02/2019   0 Comments

In a major policy shift, the six-member monetary policy committee (MPC) headed by Governor Shaktikanta Das on Thursday lower the repo rate by 25 basis points to 6.25 per cent in 4-2 vote. RBI has thus cut rate for the first time in 17 months. The last rate cut happened in August, 2017. The MPC also changed the policy stance to ‘neutral’ from ‘calibrated tightening’. This was first money policy review for former economic affairs secretary Shaktikanta Das, who took over as RBI Governor in the second week of December, 2018. The central bank sees consumer price inflation at 2.4 in January-March period and 3.2-3.4 per cent from April to September. April-September GDP growth is seen at 7.2-7.4 per cent. 

Economists were largely expecting RBI to change policy stance first and then go for a rate cut in April, thereby smoothening expectations. Repo or repurchase rate is where RBI lends money to commercial banks. India’s consumer inflation has averaged at 3 per cent in last five months against RBI’s Parliament-mandated target of 4 per cent. The economy is estimated to grow at 6.8 per cent during the second half of FY19. Economists see upside risks to inflation following the recent Budget announcements. 

“A rate cut should support the rupee as FPIs’ equity investments stand at seven times that in debt. Global rate pressures are also receding: our US economists see their 50 bp rate hike call for 2019 less likely with the Fed turning dovish,” global brokerage BofA-ML said in a report. In its last policy review, RBI had said with both inflation and growth developing ‘soft spots’, it would wait and watch for a better assessment of the situation before coming up with an appropriate risk management policy.

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