All you need to know about the monetary policy under new RBI chief Shaktikanta Das

Governor about to address press conference post release of sixth bi-monthly monetary policy statement.

The Reserve Bank of India on Thursday cut the repo rate by 25 basis points, the first time since August 2017, in a bid to boost lending and fuel growth before the general elections due in April -May. The rate cut will translate into lower borrowing rate for lenders.

The decision was taken in the three-day policy review meeting by the Monetary Policy Committee (MPC) that began in Mumbai on Tuesday. The committee is headed by RBI Governor. This was governor Shaktikanta Das’ first meeting after the Urjit Patel’s sudden departure in December 2018.

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In its last bi-monthly monetary policy, the bank had kept the repo rate unchanged at 6.5 percent and the reverse repo rate at 6.25 percent.

Repo rate, also known as the benchmark interest rate is the rate at which the RBI lends money to the banks for a short term. When the repo rate increases, borrowing from RBI becomes more expensive. This in turn, raises the interest rate in the economy and therefore reduces the total money supply.

Most economists had predicted that the repurchase rate would probably be kept steady at 6.5 percent, according to 32 of the 43 economists surveyed by Bloomberg as of Wednesday, with the rest expecting a 25 basis-point reduction.

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The RBI’s Monetary Policy Committee factored in low inflation and crude oil prices.

Other highlights of the MPC review are:

  • GDP growth for 2018-19 in the December policy was  projected at 7.4 per cent (7.2-7.3 per cent in H2) and at 7.5 per cent for H1:2019-20, with risks somewhat to the downside. The CSO has estimated GDP growth at 7.2 per cent for 2018-19. Looking beyond the current year, the growth outlook is likely to be influenced by the following factors.
  • The RBI cut its estimates on headline inflation – which cooled off to a 18-month low of 2.2 per cent in December – for the next year, and expects the number to come at 2.8 per cent in March quarter, 3.2-3.4 per cent in first half of next fiscal and 3.9 per cent in third quarter of FY20.
  • In a unanimous decision, RBI changed the stance of the monetary policy to ‘neutral’ from ‘calibrated tightening’.
  • Inflation expectations of households, measured by the December 2018 round of the Reserve Bank’s survey, softened by 80 basis points for the three-month ahead horizon and by 130 basis points for the twelve-month ahead horizon over the last round, reflecting the continued decline in food and fuel prices. Producers’ assessment of inflation in input prices eased in Q3 as reported by manufacturing firms polled by the Reserve Bank’s industrial outlook survey.
  • Since the last MPC meeting in December 2018, there has been a slowdown in global economic activity. Among key advanced economies, economic activity in the US lost some steam in Q4:2018. The outlook for Q1:2019 is clouded by the partial government shutdown, though the labour market conditions remain strong, MPC said.

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