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03-Aug2017

RBI cuts repo rate by 25 bps to 6%; lowest since 2010

Citing reduction in upside risk to inflation, the Reserve Bank of India's (RBI's) Monetary Policy Committee (MPC) decided to cut repo rate or its key lending rate by 25 basis points to 6% from 6.25%, it is lowest in six-and-a-half years since November 2010, as a slump in food prices sent June consumer inflation to a more than five-year low of 1.54%. Consequently, the reverse repo rate has also been reduced by 25 bps to 5.75%, and the marginal standing facility (MSF) rate and the Bank Rate to 6.25%. Besides, RBI kept the Statutory Liquidity Ratio (SLR) unchanged at 20%. The RBI's move was in line with market expectations and will lower EMIs for home, auto and personal loans.

In its third bi-monthly monetary policy review for FY18, the RBI also decided to keep the policy stance neutral with the objective of achieving the medium-term target for consumer price index (CPI) inflation of 4% within a band of +/- 2%, while supporting growth. It stressed on urgent need to reinvigorate private investments, clear infrastructure bottlenecks and provide a major thrust to the Pradhan Mantri Awas Yojana. The RBI reiterated its projection of April-September inflation at 2-3.5%, rising to 3.5-4.5% over the next six months. It has also retained its forecast of economic growth (gross value added) at 7.3% in the year through March.

The central bank in its policy statement also pointed out several factors contributing to uncertainty around inflation trajectory. It said implementation of farm loan waivers by states may result in possible fiscal slippages and undermine the quality of public spending, entailing inflationary spillovers. Moreover, the timing of the States' implementation of the salary and allowances award is critical - it is not factored into the baseline projection in view of lack of information on their plans. It added that there is a scope for banks to cut rates further, especially for those sectors which have not benefited in the past rate cuts. The rate cut decision was not unanimous , as four members of the Monetary Policy Committee voted to cut rates by 25 bps, while one voted for a 50 bps cut and one voted for leaving rates unchanged. The next meeting of the MPC is scheduled on October 3 and 4, 2017.


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