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India unexpectedly cuts key rate, changes stance to neutral

08 February, 2019, 09:42 | Author: Sara Gill
  • Explained Why the RBI's decision to cut repo rate comes as a surprise

The 6-member Monetary Policy Committee (MPC), headed by Patel, reduced repo rate or the short term rate at which central bank lends to banks, to 6.25 percent.

Ahead of the policy, opinion was divided on whether RBI would cut rates and economists had cited many reasons for the central bank to stay put; the budget was expansionary and easing would put pressure on prices, RBI's policy stance of "calibrated tightening" and the fact that banks needed to attract Rs 20 lakh crore of deposits to fund credit needs according to a Crisil report.

The ruling Bharatiya Janata Party is already in election mode. "It also signals a commitment to a symmetric policy to achieve its 4 per cent inflation target - a departure from the RBI's previous one-sided, conservative stance that aimed to keep inflation below the target."- Abhishek Gupta, Bloomberg Economics. Mr Das also hinted at more rate cuts in future as inflation is slowing down. However, all the members agreed on changing the policy stance to neutral.

Commenting on the RBI rate cut, Ankur Dhawan- Chief Investment Officer-PropTiger.com, said "Industry was expecting a bigger rate cut than announced". The pace has steadily dropped since June's 4.92 percent. The next meeting of the committee is scheduled from April 2 to April 4. He, however, added that the RBI's track record in projection inflation accurately is no different from the experience of global central banks, who have also seen inflation veer off the expected track in recent years.

Four of the six MPC members voted to cut the rates, while all backed the change in stance.

Economic growth fell to a worse-than-expected 7.1% in the July-September quarter from 8.2%, dragged down by slower consumer spending and farm growth, below analysts forecast for a 7.4% increase.


This is Das' first monetary policy review after taking charge as the RBI Governor, replacing Urjit Patel.

Nomura is of the view that RBI's new growth forecasts are too optimistic.

"To see this as a capitulation of the government's demands is profoundly misguided", said Abheek Barua, chief economist of HDFC Bank.

The Modi government has been pushing for a rate cut by the RBI as it looks to support growth by increasing credit offtake to key sectors of the economy.

The Indian financial markets gave up some gains while 10-year bond yields slid 5 basis points after the surprise rate cut.

The rupee weakened to 71.69 to the dollar immediately after the announced but strengthened soon after to 71.42.

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