RBI's new governor Urjit Patel cuts interest rates by 25 bps in debut policy

Image: Anindito Mukherjee / Reuters

The Reserve Bank of India (RBI), headed by the newly appointed governor Urjit Patel, cut interest rates by 25 basis points in a bid to spur growth. The repo – the rate at which the central bank lends to commercial banks – has come down to a six-year-low of 6.25 percent and resultantly, the reverse repo rate has also come down by the same percentage.

This is the first decision announced by the newly formed six-member monetary policy committee (MPC), which includes 52-year-old Patel. It was a unanimous vote in favour of the rate cut, the RBI said in a statement posted on its website.

The MPC comprises two top RBI officials (deputy governor R Gandhi and executive director Michael Patra); three economists (Chetan Ghate, Pami Dua and RH Dholakia) and the bank governor. “We met for one-and-a-half days… there were several discussions, drafts and meetings. The discussions were frank and intense and there was no wrangle,” Patel told the media at a brief press conference on Tuesday afternoon.

Patel took charge as RBI governor after former governor Raghuram Rajan vacated the post after one term of three years, indicating his intention to continue with academics.

Economists and analysts were divided on whether Patel would lower rates in his debut policy.

The decision to cut rates came at a time when consumer inflation eased to a five-month low of 5.05 percent in August 2016 on the back of lower rises in the prices of vegetables and pulses. But CPI inflation in July was at a 23-month high of 6.07 percent.

“The decision of the MPC is consistent with an accommodative stance of monetary policy inconsonance with the objective of achieving consumer price index (CPI) inflation at five percent by Q4 of 2016-17 and the medium-term target of four percent within a band of +/- two percent,” Patel said in the statement.

The stock markets rallied briefly after the announcement of the rate cut, but saw a pull back immediately after that. The benchmark 30-share Sensex index ended up 0.32 percent to 28,334.55 points.

Kotak Mahindra Bank’s consumer banking president Shanti Ekambaram said: “The first MPC meeting (announcing a rate cut) has been as per expectations, in line with the softening of inflation. The normal monsoon and record agricultural sowing have softened food prices, indicating that inflation will be on the desired trajectory. Monetary policy stance remains accommodative. It is likely to be data-driven on inflation, with caution on impact of 7th pay commission.”

Commenting on non-performing assets, Patel said, the RBI will deal with the problem with firmness and pragmatism. “The situation will require thoughtful endeavour,” Patel said. A key programme, the ongoing Asset Quality Review -- initiated by Rajan last year -- which is pushing public and private sector banks to clean up their balance sheets of rising bad loans, will also be monitored carefully till its deadline ends in March 2017.

Patel is an economist from Yale University, has worked at the International Monetary Fund from 1990 to 1995 and been a non-resident Senior Fellow at the Brookings Institution since 2009.

Patel had headed the panel leading to the formation of the MPC, which aims to provide greater transparency to monetary policy while taking the onus of interest rate decisions away from the sole purview of the RBI governor.