The Reserve Bank of India cut down repo rate by 25 basis points (bps) declining to 6.25 per cent. It also changed its stance on monetary policy from “calibrated tightening” to “neutral” for inflation stayed below the 4 per cent target of Central bank.
The policy statement is the first under newly appointed RBI governor Shaktikanta Das, who took charge in December last year following sudden exit of Urjit Patel.
The repo rate is the rate at which the Reserve Bank lends short-term money to the banks, while the reverse repo rate is the rate at which the central bank borrows money from commercial banks. The reverse repo rate has been reduced to 6 per cent.
Usually when RBI cuts repo rate, banks typically pass on the benefit to the customers. If the banks decide to pass on the rate cut, then the auto, home and other loans are likely to get cheaper.
“Turning to the growth outlook, GDP growth for 2018-19 in the December policy was projected at 7.4 per cent (7.2-7.3 per cent in H2) and at 7.5 per cent for H1:2019-20, with risks somewhat to the downside,” the RBI said in a statement.
In its December monetary policy review, the RBI had kept interest rates unchanged but held out a promise to cut them if the upside risks to the inflation do not materialise.
Data released by the Central Statistics Office (CSO) showed consumer price index (CPI) based inflation at an 18-month low of 2.19 per cent in December against 2.33 per cent a month ago, as food prices continued to slide.
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.
The government is already in an election mode. In its budget on February 1, it has doled out cash to farmers and tax cuts to middle-class families, at the cost of a wider fiscal deficit and larger borrowing.
The RBI’s monetary policy xommittee (MPC) began its three-day meet on Tuesday to decide on key rates amid expectations that it may change its policy stance to ‘neutral’ from ‘calibrated tightening’ on low inflation footprint, even as a rate cut was ruled out by many experts.
Markets also surged on across-the-board buying amid expectations of shift in RBI’s policy stance and rate cut.
“Domestic market rallied 1 per cent led by broad-based buying across sectors, Nifty breached its narrow trading band of 10650- 10950 on expectation of a shift in RBI’s policy stance and strong FII inflows. Additionally, drop in bond yield and marginal strength in rupee added strength to this expectation,” said Vinod Nair, head of research, Geojit Financial Services.