RBI announces rate cut

The Monetary Policy Committee (MPC) decided at its first policy review to reduce the benchmark repurchase rate by 25 basis points to 6.25 per cent. The Reserve Bank of India’s key policy interest rate has now been cut to its lowest level since 2011.

The six-member MPC was unanimous in its decision, the RBI said in a statement on Tuesday.

“The decision of the MPC is consistent with an accommodative stance of monetary policy in consonance with the objective of achieving consumer price index inflation at 5 percent by Q4 of 2016-17,” the central bank said in its statement. Retail inflation dropped to a five-month low of 5.05 per cent in August.

Governor Urjit Patel, who briefed the media for the first time since his elevation, gave no hint of what the committee’s future stance on interest rates could be. However, his colleague on the MPC and RBI Executive Director M.D. Patra hinted there was scope for policy interest rates to ease further when he said the neutral rate is 1.25 per cent, which is lower than the 1.5-2 per cent regime that prevailed under the previous governor Raghuram Rajan.

The neutral rate is the difference between the risk free rate and inflation — a key determinant of the policy rate.

Market participants expect interest rates to ease further in the next policy review in December.

Governor Patel clarified that the central bank aims to achieve the 4 per cent inflation target within a range of +/- 2 per cent as the medium term objective, that is, by 2021. This means, the earlier objective of taming inflation to 4 per cent level by March 2018 stands null and void.

The 25 basis points rate reduction was largely factored in by the market with the 30-share Sensex gaining 377.33 points on Monday on expectations of a rate cut. On Tuesday, the Sensex gained 91.26 points to close at 28,334.55.

With this rate cut, RBI has reduced the policy rate by 175 bps since January 2015. However, banks so far have not passed on the full quantum of the rate reductions to lending rates which Mr. Patel acknowledged.

“I agree that the transmission to bank lending and to bank borrowers has been less than any one of us would have liked. We are hoping that over the next quarter or two, keeping in mind that the government has also reduced the small savings rate, that the MCLR calculation will throw up more transmission,” Mr. Patel said.

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Source:The hindu

RBI