The Reserve Bank of India (RBI), in an early pre-Diwali gift, cut the key policy repo rate by 25 basis points to 6.25 per cent, its lowest since November 2010, in its bi-monthly monetary policy announced on Tuesday. Consequently, the reverse repo rate has also come down to 5.25 per cent, always 100 basis points lower than repo.
Lower interest rates and consumption takeoff due to the 7th Pay Commission award and a good monsoon will revive rural and urban growth as well as pump prime the stagnant investment cycle. Benign inflation may see another rate cut in December. For a borrower, say if she has taken a Rs 50-lakh loan with a 20-year tenure, the saving will be approximately Rs 821 per month.
The move to slash the repo rate — the rate at which banks borrow from the RBI — was taken by the newly-formed Monetary Policy Committee (MPC), which was chaired by the governor Urjit Patel. The decision of the MPC was unanimous, with all six members voting in favour of the cut. It was Mr Patel’s maiden monetary policy review. With Tuesday’s cut, the repo rate is now at its lowest level since November 2010. This marks a departure from Mr Patel’s predecessor Raghuram Rajan who was considered an inflation hawk and it was felt, particularly in government circles, that he didn’t respond to the interest curve levelling out with greater alacrity.
Bankers signalled that with the banking system flush with liquidity and with the festive season round the corner, they may cut lending rates. PNB had provided a pointer on Monday itself, when it cut deposit rates by 30 basis points. Core liquidity has increased from Rs 33,200 crore in August to Rs 48,700 crore in September which is likely to aid in monetary transmission.
Michael Patra, executive director at RBI, stated at the conference that in light of falling neutral rates globally, the RBI believes the appropriate neutral real rate for India has fallen to 1.25 per cent from 1.5-2 per cent previously. On liquidity, the RBI reaffirmed its commitment to keeping banking system liquidity around neutral.
The RBI left its baseline CPI projection unchanged at 5 per cent for March 2017, with risks “titled to the upside, albeit lower than in June and August”. It now sees CPI inflation at 4.5 per cent by Q4 2018 (up from the April projection of 4.2 per cent with an upside risk).
The RBI projects FY17 GVA growth of 7.6 per cent with balanced risks, unchanged from its August policy meeting. Further out, it expects GVA growth to recover to 7.9 per cent in FY18, but with downside risks due to weaker global demand.