RBI Cuts Repo Rate To 7-Year Low Of 6%, Loans Could Get Cheaper

The monetary policy committee of the Reserve Bank of India (RBI) today cut repo rate or its key lending rate by 25 basis points to 6 per cent.

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RBI Cuts Repo Rate To 7-Year Low Of 6%, Loans Could Get Cheaper

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RBI cut the reverse repo rate to 5.75 per cent.

Highlights

  1. The monetary policy committee of RBI cut repo rate to 6%
  2. The decision of the MPC is consistent with a neutral stance, RBI said
  3. Banks may pass on the repo rate cut by cutting interest rates on loans
The Monetary Policy Committee (MPC) of the Reserve Bank of India (RBI) today cut repo rate, or its key lending rate, by 25 basis points to 6 per cent - the lowest since November 2010. Falling inflation allowed the central bank to focus on boosting the economy which grew at the slowest pace in over two years in the January-March quarter. Banks could lower lending rates further, making loans cheaper. RBI chief Urjit Patel, addressing the media, said banks have scope for lowering lending rates further in some segments where transmission of lower rates "has not been faster".

The RBI's move was in line with market expectations. Forty of 56 economists polled by Reuters had expected the central bank to cut its repo rate by a quarter percentage point to 6 per cent.

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.

(Read: RBI Becomes First In Asia To Cut Rates This Year)

The Reserve Bank of India's decision to cut interest rates on Wednesday was an "important" step for ensuring sustained economic growth, said Economic Affairs Secretary Subhash Chandra Garg.

The RBI reiterated its projection of April-September inflation at 2-3.5 per cent, rising to 3.5-4.5 per cent over the next six months. It also retained its forecast of economic growth (gross value added) at 7.3 per cent in the year through March.

The RBI also retained its "neutral" stance, and warned inflation could accelerate, while pinning future action on data. "The MPC (monetary policy committee) remains focused on its commitment to keeping headline inflation close to 4 percent on a durable basis," the RBI said in a statement.

The RBI stuck to its inflation projections, including that price increases could accelerate to 3.5 per cent to 4.5 per cent in October-December.

(Also read: RBI To Drain Liquidity Without Destabilising Markets, Says Deputy Governor)

The RBI in its policy statement also pointed out several factors contributing to uncertainty around inflation trajectory. "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," the RBI said.

"Also, high frequency indicators suggest that price pressures are building up in vegetables and animal proteins in the near months," the RBI added.

Economists expect the RBI to further cut rate later this year, if inflation remains low. Yogesh Nagaonkar, fund manager at Bonanza PMS, said: "The market was optimistic about a cut and a 25 basis point cut is on expected lines and I am expecting two more cuts of 25 basis points each this year."

Anita Gandhi, whole-time director at Arihant Capital, said: "If RBI gets confirmation that inflation will remain in the lower territory, there is a possibility of a further rate cut."

(With agency inputs)

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