RBI Slashes Repo Rate by 25 Basis Points, Changes Stance to 'Neutral'

Jermaine Castillo
February 8, 2019

The apex bank panel has reduced the key interest rate on expectation of inflation staying within its target range, which is a good news for people as they would eventually have to pay lower monthly installments for home and other loans.

"On the basis of an assessment of the current and evolving macroeconomic situation at its meeting today, the Monetary Policy Committee (MPC) chose to reduce the policy repo rate under the liquidity adjustment facility (LAF) by 25 basis points from 6.50% to 6.25% with immediate effect", the RBI said in a statement.

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

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The MPC also changed its stance to "neutral" from the "calibrated tightening" adopted in October meet previous year. This is the first rate cut announced by the MPC since August 2017.

It has revised downwards the path of retail inflation to 2.8 per cent in the fourth quarter of the fiscal, 3.2-3.4 per cent in the first half of 2019-20 and 3.9 per cent in the third quarter of 2019-20, with risks broadly balanced around the central trajectory.

Technically, a 25 bps rate cut doesn't mean much to the borrower. Mr Das also hinted at more rate cuts in future as inflation is slowing down. 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.

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A former economic affairs secretary, who now has the charge of central bank and is perceived to be close to the Union government, will not take "no" from banks on rate cuts too quickly.

This was the first RBI policy meeting since Das took over as the RBI governor in December.

"The MPC notes that the output gap has opened up modestly as actual output has inched lower than potential".

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"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 need is to strengthen private investment activity and buttress private consumption".

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