RBI Policy: MPC Cuts Benchmark Rate, RBI Governor Emphasises Growth

Mae Love
February 7, 2019

The committee voted 4:2 in favour of the rate cut but was unanimous on change in stance.

RBI Governor Shaktikanta Das cut the interest rate by 0.25 percent to 6.25 percent, a move that will lead to reduction of lending rate by banks leading to lower EMI for housing, auto loan and corporate borrowers. The MPC also made a decision to change the monetary policy stance from calibrated tightening to neutral. Inflation estimates have been revised very sharply lower by the central bank.

"On the basis of an assessment of the current and evolving macroeconomic situation at its meeting today, the Monetary Policy Committee (MPC) made a decision 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. But core inflation - which strips out volatile food and fuel prices - has hovered around 6 percent due to elevated education and medical costs. The MPC is mandated to target headline inflation based on the consumer price index (retail inflation).

The rate cut is in consonance of achieving the medium-term objective of maintaining inflation at the 4 percent level while supporting growth, it said.

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Hopefully, the RBI's move should also help ease the liquidity situation in the market, now facing the IL&FS imbroglio, debt defaults by other corporates and high NPAs in the banking sector.

"However, we will not be overtly surprised if the RBI delivers a 25 bps rate cut on February 7 itself", the report had said.

The central bank also projected an economic growth rate of 7.4% for the next fiscal year, up from 7.2% estimated for the current fiscal year by the Central Statistics Office (CSO). The first advance estimates released by the government peg GDP growth at 7.2 percent compared to the RBI's initial estimate of 7.4 percent. The full impact of some of the measures is likely to materialize over a period of time, RBI governor Shaktikanta Das said in his monetary policy statement.

April-September GDP growth is seen at 7.2-7.4 per cent.

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