RBI governor Urjit Patel
Image: Danish Siddiqui/ Reuters
The Reserve Bank of India (RBI) on Wednesday lowered the benchmark repo rate by 25 basis points, as retail inflation slipped to a record low in June. This was widely in line with what most economists and analysts had expected and the stock markets were not enthused by the announcement.
The benchmark 30-share BSE Sensex slid 0.30 percent or 98.43 points to 32,476.74 points, pulled down by banking stocks such as Kotak Mahindra Bank, Yes Bank, IndusInd Bank and State Bank of India.
The repo rate -- the rate at which the central bank lends to commercial banks – now stands at 6.0 percent – a 6½ year low -- from a 6.25 percent earlier.
Consequently, the reverse repo rate stands adjusted to 5.75 percent, and the marginal standing facility (MSF) rate and the bank rate to 6.25 percent.
This is the first cut in key policy rates since October 2016, which was Urjit Patel’s first monetary policy outing since taking charge as the RBI Governor. The voting in favour of a rate cut was 4 Monetary Policy Committee (MPC) members to two.
There is, however, little clarity on whether the RBI will continue to lower rates in coming policy meetings this fiscal, and the MPC did not specifically indicate whether there is room for further interest rate cuts. But Patel said on Wednesday that the central bank will continue to retain its “neutral” stance on monetary policy, considering that inflation is set to pick up again in the coming months. India’s consumer price inflation (CPI) for June 2017 stands at 1.54 percent, a record low. Inflation has been falling due to lower food prices.
“The MPC noted that some of the upside risks to inflation have either reduced or not materialised - the baseline path of headline inflation excluding the HRA impact has fallen below the projection made in June to a little above 4 percent by Q4; inflation excluding food and fuel has fallen significantly over the past three months; and, the roll-out of the GST has been smooth and the monsoon normal,” Patel said, in the statement posted on the RBI website.
Patel reiterated that inflation could climb back to the 4 percent level by the January to March 2018 quarter.
Patel also said that the MPC was 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."
"There is a very small possibility of a further rate cut in coming quarters, after the dust settles. The RBI seems to be done for now,” Abheek Barua, chief economist of HDFC Bank told Forbes India.
HDFC chairman Deepak Parekh told CNBC-TV18 that the rate cut was not a surprise, considering that food prices had slid sharply in recent weeks.
Dharmakirti Joshi, chief economist with Crisil told Forbes India: “Inflation has been surprising us on the downside, so it will all be data driven. The RBI is unlikely to move to an accommodative stance soon, it will not act in haste.”
It is likely that the RBI will continue to focus on the implementation of house rent allowance (HRA) under the 7th Central Pay Commission and its impact on the consumer price inflation index; the impact of the price revisions withheld ahead of the Goods and Services Tax (GST); and the disentangling of the structural and transitory factors shaping food inflation.
RBI’s deputy governor Viral Acharya said that the RBI will be setting up an internal study group to study the Marginal Cost of Funds (MCLR) to see if banks' lending rates can be integrated directly to market rates to improve monetary policy transmission. The report will be submitted by September 2017.