With the inflation rate coming below eight percent as targeted by January 2015 and likely to be below six percent by January 2016, the Reserve Bank of India (RBI) has reduced the repo rate by 25 basis points, said the bank Governor Raghuram. G. Rajan Thursday.
In a statement, Rajan said: "In its public interactions, the RBI had committed to initiate the process of monetary easing as soon as data indicated that medium term inflationary targets would be met."
He said with this commitment in mind, it has been decided to reduce the policy repo rate (the rate at which RBI lends to commercial banks) under the liquidity adjustment facility (LAF) by 25 basis points from 8.0 percent to 7.75 percent with immediate effect.
Rajan also said the RBI has decided to keep the cash reserve ratio (CRR) of scheduled banks unchanged at four percent of net demand and time liabilities (NDTL). He said the RBI would continue to provide liquidity under overnight repos at 0.25 percent of bank-wise NDTL at the LAF repo rate and liquidity under 7-day and 14-day term repos of up to 0.75 percent of NDTL of the banking system through auctions, and continue with daily variable rate repos and reverse repos to smooth liquidity.
Consequently, the reverse repo rate under the LAF stands adjusted to 6.75 percent, and the marginal standing facility (MSF) rate and the Bank Rate to 8.75 percent with immediate effect, he said.
According to him, lower than expected inflation has been enabled by the sharper than expected decline in prices of vegetables and fruits since September, ebbing price pressures in respect of cereals and the large fall in international commodity prices, particularly crude oil.
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"Crude prices, barring geo-political shocks, are expected to remain low over the year. Weak demand conditions have also moderated inflation excluding food and fuel, especially in the reading for December. Finally, the government has reiterated its commitment to adhering to its fiscal deficit target," Rajan said. These factors have significantly reduced the momentum of inflation, compensating for the widely anticipated ending of favourable base effects.
Households' inflation expectations have adapted, and both near-term and longer-term inflation expectations have eased to single digits for the first time since September 2009.
"These developments have provided headroom for a shift in the monetary policy stance. It may be recalled that the fifth bi-monthly monetary policy statement of December had stated that if the current inflation momentum and changes in inflation expectations continue, and fiscal developments are encouraging, a change in the monetary policy stance is likely early next year, including outside the policy review cycle," Rajan said.