RBI cuts repo rate by 25 bps to 6%-The Total Investment & Insurance Solutions

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2 August  2017

 

RBI (The Total Investment & Insurance Solutions)

As expected by many economists, the Monetary Policy Committee (MPC) in its third review for FY2017-18 on Wednesday reduced repo rate by 25 basis points to 6% from 6.25%. Consequently, the reverse repo rate under the liquidity adjustment facility (LAF) will also come down to 5.75%, while marginal standing facility (MSF) rate and the bank rate will be at 6.25%. 

In a statement, the Reserve Bank of India (RBI) says, "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% within a band of +/- 2 per cent, while supporting growth." The Total Investment & Insurance Solutions

The MPC says it noted some of the upside risks to inflation have either reduced or not materialised. This includes, the baseline path of headline inflation excluding the HRA impact has fallen below the projection made in June to a little above 4% by fourth quarter, inflation excluding food and fuel has fallen significantly over the past three months; and, the roll-out of the goods and service tax (GST) has been smooth and the monsoon normal.

"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 bps. 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 4% on a durable basis," it said. The Total Investment & Insurance Solutions

The MPC observed that while inflation has fallen to a historic low, a conclusive segregation of transitory and structural factors driving the disinflation is still elusive. In respect of inflation-sensitive vegetables, prices are recording spikes. Excess supply conditions continue to push down prices of pulses and keep those of cereals in check. The MPC will continue monitoring movements in inflation to ascertain if recent soft readings are transient or if a more durable disinflation is underway. In its assessment of real activity, the MPC noted that while the outlook for agriculture appears robust, underlying growth impulses in industry and services are weakening, given corporate deleveraging and the retrenchment of investment demand.

Commenting on the the state of the economy, the MPC says it is of the view that there is an urgent need to reinvigorate private investment, remove infrastructure bottlenecks and provide a major thrust to the Pradhan Mantri Awas Yojana for housing needs of all. This hinges on speedier clearance of projects by the States. On their part, the Government and the Reserve Bank are working in close coordination to resolve large stressed corporate borrowers and recapitalise public sector banks within the fiscal deficit target. These efforts should help restart credit flows to the productive sectors as demand revives. The Total Investment & Insurance Solutions

Dr Chetan Ghate, Dr Pami Dua, Dr Viral V Acharya and Dr Urjit R. Patel were in favour of the monetary policy decision, while Dr Ravindra H Dholakia voted for a policy rate reduction of 50 basis points and Dr Michael Debabrata Patra voted for status quo. The Total Investment & Insurance Solutions

Here are the latest policy rates following MPC review… 

Repo Rate......................6.0%

Reverse Repo Rate........5.75%

Bank Rate......................6.25%