RBI cuts repo rate in first policy review under new governor

RBI Policy MPC Cuts Benchmark Rate RBI Governor Emphasises Growth

In its budget on February 1, the government doled out cash to farmers and tax cuts to middle-class families, at the cost of a wider fiscal deficit and larger borrowing. "Investment activity is recovering supported mainly by public spending on infrastructure", RBI Governor said.

The Monetary Policy Committee (MPC) on February 7 changed its stance to neutral from calibrated tightening as expected, but what came as a surprise to the Street was a rate cut of 25 bps which most global brokerages think is just the beginning of easy monetary policy cycle. The six-member Monetary Policy Committee voted unanimously to switch its stance to neutral from "calibrated tightening" adopted in October. Repo rate is the rate at which RBI lends to commercial banks. With headline inflation around 4 percent, RBI may use policy space to boost growth.

The rate cut is in the right direction given that the inflation footprint has been benign for some time.

This was the first meeting of the monetary policy committee (MPC) under Shaktikanta Das who took over as the RBI governor in December after the sudden exit of Urjit Patel over differences with the Modi government. The pace has steadily dropped since June's 4.92 percent. However, inflation dropping to a 18-month low of 2.19% in December appears to have prompted the MPC to go in for a cut.

The MPC also trimmed its economic growth forecast, to 7.2-7.4 percent during April-September, from its previous 7.5 percent estimate. The governor, however triggered concerns of back-tracking on the central bank's move to peg retail loans to an external benchmark from April 2019, by referring to RBI's earlier circular as a discussion paper.

Four of six members of the MPC voted to cut the rates, while all six voted for a change in the stance.

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The Reserve Bank of India (RBI) on Thursday retained the country's gross domestic product (GDP) forecast for FY20 at 7.4 per cent. Addressing the media on Monetary Policy, RBI Governor Shaktikanta Das said GDP projection for 2019-20 is 7.4 per cent while the inflation rate is estimated at 3.2-3.4 per cent in the first half of the year 2019-20 and 3.9 per cent in the third quarter of 2019-20.

The decision "restores growth maximisation as a secondary objective of the RBI".

"To see this as a capitulation of the government's demands is profoundly misguided", said Abheek Barua, chief economist of HDFC Bank.

The RBI policy is a very dovish one and signals further rate cuts.

The Indian rupee weakened to 71.69 to the dollar immediately after the announced but strengthened soon after to 71.42.

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