RBI: Repo rate reduced by 25 basis points

RBI: Repo rate reduced by 25 basis points

The six-member MPC, headed by Reserve Bank of India Governor Shaktikanta Das, began its meeting on Tuesday and announced its decision on Thursday. "Many times, we borrow from private moneylenders at a rate of 24 percent as banks refuse to lend us more", said Deshpal Rana, a farmer from Shamli in Uttar Pradesh. It is the first rate cut in 17 months.

No surprises, no twists, transparent and extensive communication - both in policy documents as well as at the press conference - that is how one need to look at today's Reserve Bank of India (RBI) Monetary Policy Committee (MPC) review.

The GDP growth for 2019-20 is projected at 7.4 per cent - in the range of 7.2-7.4 per cent in H1, and 7.5 per cent in Q3 - with risks evenly balanced, it said in its press release.

The RBI also eased bank lending restrictions for non-banking finance companies and raised the limit on "collateral free" farm loans in an attempt to boost lending to almost 120 million rural households.

"There is a possibility of another rate cut by the central bank in April".

"The rate cut is unlikely to give a major fillip to investments as capacity utilisation still remains low in the manufacturing sector", said Devendra Kumar Pant, chief economist, India Ratings & Research, the arm of rating agency Fitch.

The inflation rate is estimated at 3.2-3.4% in the first half of the year 2019-20 and 3.9% in the third quarter of 2019-20, he said.

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The committee though flagged external headwinds including trade tensions, and crude oil prices, which though appear well-behaved now.

"First, aggregate bank credit and overall financial flows to the commercial sector continue to be strong, but are yet to be broad-based. Secondly, in spite of soft crude oil prices and the lagged impact of the recent depreciation of the Indian rupee on net exports, slowing global demand could pose headwinds".

"Continuing deflation in food items, a sharp fall in fuel inflation and some edging down of inflation excluding food and fuel contributed to the decline in headline inflation", the RBI said.

With regard to inflation, the central bank said there were "some uncertainties warrant careful monitoring".

Inflation expectations, a broad measure of what businesses, investors and households think about how prices will change in the coming months, have softened by 80 basis points for the next three months and the 130 points in the next 12 months, according to the RBI's latest survey in December 2018. "Growth in rural wages moderated in October", RBI said.

The six-member monetary policy committee voted 4:2 in favour of the rate cut, while the decision to change policy stance was unanimous.

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