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07 February 2019, 05:00 | Joann Bryant
RBI Policy: MPC Cuts Repo Rate by 25 Basis Points to 6.25%
While reducing the interest rate, the Central bank said headline inflation is projected to remain soft in the near term reflecting the current low level of inflation and the benign food inflation outlook.
RBI's Monetary Policy Committee (MPC), the designated inflation nutter, also changed its stance to neutral allowing itself more headroom to either hike or cut rates in the near future.
With headline inflation hovering at multi-month lows, India's real interest rate makes it a standout in the region, and harmful to economic growth, according to analysts including Bank of America Merrill Lynch's Chief Economist Indranil Sen Gupta. The Federal Reserve has changed direction, and now many analysts expect no USA rate hikes this year, after four in 2018. The pace has steadily dropped since June's 4.92 percent.
India's retail inflation declined from 3.4 per cent in October 2018 to 2.2 per cent in December, well below the bank's target of four percent. MPC members Viral Acharya and Chetan Ghate voted against a rate cut.
The biggest take away from the policy on Thursday is that this marks the beginning of a fresh rate cut cycle after a prolonged period of rate pause and the MPC wants the markets to understand that.
Statistics showed the economy expanded only 7.1 per cent on-year in July-September, down from 8.2 percent in the previous quarter.
Owing to benign inflation numbers, the central bank changed its policy stance to neutral from calibrated tightening, adopted in October policy meet past year under the then RBI Governor Urjit Patel.
Patel's exit prompted some to fret the RBI's independence was under threat, but some economists argued that Thursday's decision should not be read as a surrender to pressure. Earlier, when Urjit Patel took charge as the RBI Governor, he shifted from the usual practice of announcement at 11 am and presented the fourth bi-monthly (his maiden) monetary policy review at 2:30 pm after the MPC meeting.
"Das has delivered what the Modi government was hoping for", said Mark Williams, chief Asia economist at Capital Economics Ltd.in London.
Technically, a 25 bps rate cut doesn't mean much to the borrower.
The rupee weakened to 71.69 to the dollar immediately after the decision, but it later strengthened to 71.42.
The NSE index was up 0.04 percent at 11068.05 while the 10-year benchmark government bond yield fell to 7.51 percent from Wednesday's close of 7.56 percent.
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