The Monetary Policy Committee of the Reserve Bank of India (RBI) cut a key lending rate by 25 basis points on Tuesday at the conclusion of its first meeting over two days, bringing much relief to commercial banks and India Inc.
With the decision, the repurchase rate, or the short-term lending rate charged by the central bank on borrowings by commercial banks, stands lowered to 6.25 per cent. The reverse repurchase rate also automatically stands lowered to 5.75 per cent.
This was the first meeting of the new policy panel, constituted by the government with the primary mandate to ensure a retail inflation of 4 per cent, plus or minus two percentage points.
The panel said in a statement that the decision taken on Tuesday was consistent with an accommodative stance, with the objective of achieving the inflation target.
All six members of the panel, chaired by RBI Governor Urjit Patel, voted in favour of the monetary policy decisions -- the minutes of which will be released on October 18.
The markets responded to the decision with a spike in key indices. The sensitive index of the BSE which was ruling at around 28,250 points just ahead of the announcement, rose to around 28,380 points.
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The key index eventually ended the day's trade higher by 91.26 points, or 0.32 per cent to 28,334.55 points.
The key policy rate was last reduced in April. At that time the central bank had cut its key lending rate by 25 basis points in the first monetary policy review during the current fiscal.
The reduction followed the central government's fiscal prudence steps, along with a cut in interest rates on small savings rates and moderate inflation.
Besides, the central bank retained the country's growth target at 7.6 per cent for this fiscal and predicted the retail inflation to ease to around 5 per cent.
"On balance, the committee envisages a trajectory taking headline consumer price index inflation towards a central tendency of 5 per cent by March 2017, with risks tilted to the upside," the panel said.
"The projection of growth of real gross value added (GVA) for 2016-17 also is retained at 7.6 per cent, with risks evenly balanced around it," the committee said, referring to the new measure now for growth -- which, unlike gross domestic product (GDP), excludes subsidies and taxes.
The panel's projection on inflation was based on its reading that a strong improvement in sowing, along with supply-side management measures, will improve the food inflation outlook.
It also said that the government has taken several measures to ease inflationary pressures, especially in pulses.
"This has opened up space for policy action, as indicated in the third bi-monthly monetary policy statement," it said.
"The committee took note of potential cost push pressures that may emerge, including the 7th Pay Commission award on house rent allowances and the increase in minimum wages with possible spill overs through minimum support prices," the panel added.
Data on the consumer price index had showed that the annual retail inflation had eased by 100 basis points to 5.05 per cent in August.
India Inc. welcomed the RBI's decision and said that more than the quantum of the rate cut, the central bank has sent a very positive message.
"We can very clearly see that in the growth-inflation trade-off, the RBI is favourably inclined towards promoting growth in the economy," said CII Director General Chandrajit Banerjee.
"The RBI intervention to reduce interest rates and other welcome liquidity supporting measures would enable banks to transmit the cut to borrowers and thereby support the growth cycle."
FICCI President Harshavardhan Neotia said: "The performance of the industrial sector has been volatile and would need continued support. Businesses need to see an urgent revival in growth."
Another leading business chamber Assocham pointed out that global headwinds weighed more on the MPC than the domestic issues which seem to be getting favourable.
"Risks from uncertainties around the global events like the US Presidential elections, possibility of interest rates hike by the US Federal Reserve, uptick in crude oil prices and the final play out of Bexit would have forced the RBI to stay cautious with a touch of optimism," Assocham Secretary General D.S. Rawat
On their part key bankers said that the cut in key policy rate has provided them with an opportunity to lower their lending rates.
"With benign inflation trajectory going forward, RBI's policy stance is expected to remain accommodative. Banks will continue to transmit rates based on evolving liquidity scenario," said Arundhati Bhattacharya, Chairman, State Bank of India (SBI).
Chanda Kochhar, Managing Director and Chief Executive Officer, ICICI Bank said: "These steps will give a strong impetus to both consumption and investment led growth for the country."
Bandhan Bank's Managing Director and Chief Executive Officer C.S. Ghosh said:"The policy rate cut will give a fillip to credit growth which continues to remain low."
"The RBI has kept its year-end inflation projection unchanged at 5 percent but the upside risk to the projection has come down," Ghosh added.
--IANS
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