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Subdued inflation prompts RBI to reduce key lending rate

rbi2Mumbai : Subdued inflation and demand prompted the RBI on Wednesday to reduce its key lending rate by 25 basis points (bps), which, however, failed to lift the sentiments of the business fraternity who felt a steeper cut would have been better.

According to the Reserve Bank of India’s third bi-monthly monetary policy review of 2017-18, the repurchase rate, or the short-term lending rate for commercial banks, stands lowered to 6 per cent from 6.25 per cent.

Subsequently, the reverse repurchase rate, or the short-term borrowing rate, has been adjusted to 5.75 per cent from 6 per cent.

Consequent to the change in the repo rate, RBI said its Marginal Standing Facility (MSF) rate stands adjusted to 6.25 per cent.

The decision to reduce the repo rate was taken by the six-member Monetary Policy Committee (MPC) headed by Patel. Four members of the panel voted in favour of reducing the key lending rate.

The six members of MPC are equally divided amongst government nominees and the RBI.

At its last policy review in June, the RBI had kept the key lending rates unchanged but induced liquidity by reducing Statutory Liquidity Ratio (SLR).

The reduction in key lending rates comes after four consecutive policy reviews in which the apex bank had maintained status quo on its repo, or short-term lending rate, since it the reduction by 25 basis points to 6.25 per cent in October 2016.

“The decision of the MPC is consistent with a neutral stance of monetary policy in consonance with the objective of achieving the medium-term target for consumer price index (CPI) inflation of 4 per cent within a band of plus, minus 2 per cent, while supporting growth,” the third bi-monthly monetary policy statement said.

“The MPC noted that some of the upside risks to inflation have either reduced or not
materialised. Consequently, some space has opened up for monetary policy accommodation, given the dynamics of the output gap. Accordingly, the MPC decided to reduce the policy repo rate by 25 basis points,” the statement said.

“Noting, however, that the trajectory of inflation in the baseline projection is expected to rise from current lows, the MPC decided to keep the policy stance neutral and to watch incoming data. The MPC remains focused on its commitment to keeping headline inflation close to four per cent on a durable basis.”

Other factors that led to the MPC in reducing the key lending rates were the “smooth implementation of the GST” and a healthy monsoon.

The equity markets, which had already discounted a 25 bps cut, also failed to be enthused by the MPC decision. The wider Nifty50 of the National Stock Exchange (NSE) fell by 33.15 points, or 0.33 per cent, to 10,081.50 points.

The 30-scrip Sensitive Index (Sensex) of the BSE, which opened at 32,641.58 points, closed at 32,476.74 points — down 98.43 points, or 0.30 per cent — from its previous close at 32,575.17 points.

Welcoming the 25 basis points cut in the repo rate, the Department of Economic Affairs (DEA) on Wednesday said the step was necessary to converge toward appropriate real monetary conditions for India’s sustained growth.

“We welcome the 25 basis points cut in the repo rate as an important step to converge toward appropriate real monetary conditions for sustained growth consistent with India’s potential and for stable, moderate inflation,” DEA Secretary Subhash Chandra Garg said in a statement here.

The business fraternity felt that a steeper cut by the central bank would have been better.

“Welcome, but too little. This rate cut was long called for, particularly as inflation is at record low and GDP growth has also lost some sheen,” said Harsh Pati Singhania, Director, J.K.Organisation and Vice Chairman & Managing Director, JK Paper.

“The 25 bps cut in repo rate is a welcome move. The current situation, however, warranted a steeper cut of 50 bps in the repo rate. The private investment cycle remains weak and the reduction in the rate will be an investment sentiment boos”er,” said Pankaj Patel, President, Ficci.

The RBI decision to cut the policy interest rates by 25 basis points is on the expected lines as the central bank continues to remain cautious as regards inflation, but what is equally significant is that it has focused on the serious problem of “he “twin balance sheets” which is one of the major road blocks for reviving private sector investment, said Assocham Secretary General D.S. Rawat.

“The monetary policy stance taken by the RBI would provide a fillip to growth especially at a time of benign core inflation print and tepid private investment. Having said so, CII feels that a steeper cut in interest rate would have been more in consonance with market realities,” said Chandrajit Banerjee, Director General, CII.


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