Money & Banking

RBI delivers the cut that cheers

Our Bureau Mumbai | Updated on January 16, 2018 Published on October 04, 2016

Urjit Patel1

The flutter of the doves RBI Governor Urjit Patel (second right) along with (from left) Deputy Governor NS Vishwanathan, Executive Director Michael Debabrata Patra, and Deputy Governors R Gandhi and SS Mundra, at a news conference of the Monetary Policy Committee in Mumbai on Tuesday PAUL NORONHA

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25-bps repo rate cut driven by optimism on inflation, govt efforts

Noting that the easing of inflation pressures had opened up the space for policy action, the Reserve Bank of India on Tuesday cut the repo rate by 25 basis points, or one quarter of 1 per cent, raising hopes of a revival of bank credit.

All six members of the newly appointed Monetary Policy Committee (MPC) voted in favour of the rate cut from 6.5 per cent to 6.25 per cent, which comes at the start of the October-March busy season.

The policy rate, or the rate at which banks borrow from the RBI, had been on hold for nearly six months. The previous cut came in early April, from 6.75 per cent to 6.50 per cent.

The panel, headed by RBI Governor Urjit Patel, cited the downward shift in the momentum of food inflation and the government’s measures to cool food inflation pressures as contributory factors.

The RBI’s fourth bi-monthly monetary policy review was Patel’s first as Governor. The Centre had constituted the MPC late last month with the mandate to maintain price stability, while keeping the growth objective in mind. The MPC’s maiden meeting was spread over two days (October 3 and 4).

A revival of credit

The MPC felt that the accommodative stance of monetary policy and comfortable liquidity conditions should support a revival of credit to the productive sectors.

The repo rate cut and the downward adjustment in small savings rates are expected to spur banks to cut deposit and lending rates. ICICI Bank responded first with a rate cut of 5 basis points.

The MPC resolution said the government’s efforts should help moderate the momentum of food inflation.

“The easy liquidity conditions engendered by the Reserve Bank’s operations should also enable the smooth transmission of the policy action through various market segments. Furthermore, banks should find added impetus for better transmission by the recent downward adjustment in small savings rates,” the statement said. Patel observed that the government had introduced structural policies and reforms to ease supply-side constraints. “Proactive food management has played a crucial role in the past two years and will continue to do so,” he noted. “The improvement in pulses supply has been the main contributor (to falling inflation). And there has been a sharp improvement in the competitiveness ranking.”

The MPC took note of potential cost-push pressures that may emerge, including the 7th Pay Commission award, the increase in minimum wages, and the higher minimum support prices. It would need vigilance to prevent a generalised cost spiral from taking root, it added.

SBI Chairman Arundhati Bhattacharya said, “The committee decision was on expected lines. With benign inflation trajectory going forward, the RBI’s policy stance is expected to remain accommodative. Banks will continue to transmit rates based on evolving liquidity scenario.”

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Published on October 04, 2016
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