RBI took sharp U-turn and lowered repo rate by 25 bps in first cut since Aug 2017
RBI MONEY POLICY HIGHLIGHTS
1. RBI Governor Das voted in favor of a rate cut
2. MPC unanimously voted to change stance to neutral
3. FY20 GDP seen at 7.4 percent
4. CPI saw at 2.4% in Jan-March 2019 and 3.2-3.4% in April-Sept
5. RBI to withdraw rule on FPI exposure to a single corporate entity
6. To raise the limit for collateral free farm loan to Rs 1.6 lakh
7. FY20 Budget proposals likely to boost aggregate demand
8. Risk weight on bank exposure to NBFCs linked to ratings
In a significant policy shift, the six members monetary policy committee (MPC) headed by Governor Shaktikanta Das ) on 7th Feb Thursday bring down the repo rate by 25 basis points to 6.25 percent in a 4-2 vote. Reserve bank of India RBI has thus cut the price for the first time in 17 months. The last rate cut occurred 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.
In post-policy interaction with media, As per the statement, Das said that move instance to neutral provides flexibility to meet growth challenges. "Farm output was expected to decelerate in FY19. Continuing deflation in food and crude led to declining in headline inflation,”.
Das also emphasized the need to strengthen private investment activity.
The central bank sees consumer price inflation at 2.4 in the January-March period and 3.2-3.4 percent from April to September.
April-September GDP growth is seen at 7.2-7.4 percent.
As per the RBI statement - Headline inflation is projected to remain soft in the near term reflecting the current low-level of inflation and the benign food inflation outlook. Beyond the near term, some uncertainties warrant careful monitoring,
The Central Bank said in the policy statement - “Gross domestic product (GDP) growth for 2019-20 is projected at 7.4 % – in the range of 7.2-7.4 % in H1, as well as 7.5 % in Q3 – with risks evenly balanced,”
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 3 percent in the last five months against RBI’s Parliament-mandated target of 4 percent. The economy is estimated to grow at 6.8 percent amid the second 50% 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.