RBI Policy: MPC Cuts Repo Rate by 25 Basis Points to 6.25%

Explained Why the RBI's decision to cut repo rate comes as a surprise

The six-member Monetary Policy Committee (MPC) of the Reserve Bank of India (RBI) chose to reduce the key policy rate or the repo rate by 25 bps to 6.25% in the last bimonthly policy review of 2018-19 while changing the policy stance to "neutral" from "calibrated tightening". MPC members Viral Acharya and Chetan Ghate voted against a rate cut.

The RBI concluded that India needs some higher monetary policy intervention, and reduced the benchmark policy rate by 25 basis points (bps) on Thursday.

The rate cut is in line with expectations as retail inflation grew by 2.2% in December its slowest in the last 18 months.

It also changed the policy stance to "neutral" from the earlier "calibrated tightening", signalling further softening on its approach to rates. The 'repo rate is a key interest rate at which the Central Bank lends short-term funds to commercial banks.

Technically, a 25 bps rate cut doesn't mean much to the borrower.

Oil prices drops below $61.5
US West Texas Intermediate ( WTI ) crude futures were at $53.74 per barrel at 0153 GMT, up 8 cents from their last settlement. The recent downswings in the crude oil market have been highly correlated with the release of the bearish economic data.

Addressing a press conference after the policy meeting, Das said inflation rate for the first half of the next financial year is estimated at 3.2%-3.4%. The central bank has cut its estimates on headline inflation for the next year.

Even though at the RBI pressure, Das maintained that the decision on lending rates would be left to the banks and was quick to add that he would meet bank heads soon where issue of inadequate monetary transmission would be discussed. While RBI's mandate is price stability (targeting inflation), the RBI Act also says that it needs to do so "keeping in mind the objective of growth", Das said then to make his point.

"The longer-term concern should be that the credibility that the RBI acquired, particularly under Governor Rajan, as an inflation fighter will be eroded", said Williams.

The shift in monetary policy comes nearly a week after Modi's government unveiled a budget packed with measures sure to please many voters, including fresh tax breaks for middle-class families and payments to India's struggling small farmers.

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