Money & Banking

Monetary policy review: RBI cuts repo rate by 25 bps

N.S.Vageesh Mumbai | Updated on January 16, 2018 Published on October 04, 2016

Urjit Patel1

The Reserve Bank of India (RBI) has decided to cut its key policy rate, or the repo rate, by 25 bps to 6.25 per cent. New Governor Urjit Patel, who took over a month ago from Dr Raghuram Rajan, announced his first monetary policy this afternoon.

There was no change in the cash reserve ratio (CRR) or the amount of money parked with the central bank as a percentage of bank deposits at 4 per cent. The decision to cut was taken after a two-day deliberation by the newly formed Monetary Policy Committee. The committee has three external members and three internal members from the RBI including the Governor. All 6 members voted in favour of a cut.

The policy announcement comes just as the traditional busy season for bank credit begins. Consumption expenditure generally sees an uptick at this time with a number of festivals following in quick succession. Bank credit which has so far remained tepid growing at about 9 per cent is expected to see a pick up in the second half of the fiscal. Bankers say that as a rule of thumb, bank credit must grow at between 2 to 2.5 times the GDP growth rate which is expected to be around 7.5% per cent currently.

The RBI has cut its key policy rate by 150 basis points from 8 per cent in early 2015 to 6.50% at the start of the current fiscal in its April policy. Since then it has maintained status quo ignoring a rising clamour from industry to cut rates further. Banks have passed on only about half these cuts to customers. The repo policy rate is now at its lowest since November 2010.

Indranil Sen Gupta, Economist, Bank of America Merrill Lynch, had said last week in an interview to BL that this was the best time for the RBI to cut if banks had to be persuaded to pass on these cuts at the start of the busy season.

Outlook on GDP growth, inflation

The RBI said in its outlook accompanying the monetary policy statement that the strong improvement in sowing along with supply management measures, will improve the food inflation outlook. It expects these measures to have a moderating influence on food inflation in the months ahead. It said this had opened up space for monetary action as indicated earlier. Noting that the RBI's OMO operations should help in providing sufficient liquidity , the monetary policy committee expressed the hope that banks will pass on the cuts in view of the impetus provided by recent cuts in small savings rate too. The Monetary policy committee expects CPI inflation to move towards 5 per cent by March 2017, with risks tilted to the upside, although lower than seen in the second and third bi-monthly policy statements of June and August, it said.



Cause for concern

Weak global demand to drag down trade volumes

Further possible downgrading of global growth

Global central banks continue to pose uncertainty to emerging markets

Seventh pay panel impact poses upside risk to inflation

Economic activity loses some pace in H1, investment demand muted

Note of caution

The MPC said that the momentum of growth is expected to quicken with a normal monsoon raising agricultural growth and rural demand, as well as by the stimulus to the urban consumption spending from the pay commission’s award. It noted that the accommodative stance of monetary policy and comfortable liquidity conditions should support a revival of credit to the productive sectors. It did however end on a note of caution by pointing out that that the continuing sluggishness in world trade and smaller terms of trade gains than in the past point to further slackening of external demand going forward. It said " accordingly, the projection of growth of real gross value added is retained at 7.6% with risks evenly balanced."

The central bank said easy liquidity conditions will help smooth policy transmission. It will continue to provide liquidity proactively.

The bank will issue operating licence of small finance banks.

The RBI said today that the worldwide the neutral rates are going down. We need to take into account global situation for determining neutral rate.

Urjit Patel on NPAs

On NPAs, the RBI Governor today said he will deal with firmness and pragmatism.

He said just five sectors form 61 per cent of total stressed assets of the banking system. They are: Infra, textile, steel, power and telecom.

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Published on October 04, 2016
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