RBI makes surprise cut in interest rate, home loans could get cheaper

07 February, 2019, 14:10 | Author: Brooke Harris
  • MPC Meet RBI cuts repo rate by 25 basis points changes stance to'neutral

The monetary policy committee (MPC) of the Reserve Bank of India cut the repo rate by 25 basis points to 6.25 percent, as predicted by only 21 of 65 analysts polled by Reuters. Real interest rates in India are among the highest in Asia, and calls for the first cut in the policy rate since August 2017 have been growing.

The repo rate is the rate at which the Reserve Bank lends short-term money to the banks, while the reverse repo rate is the rate at which the central bank borrows money from commercial banks.

This was also the last meeting of the MPC before the Election Commission announces the dates for the Lok Sabha elections. But core inflation - which strips out volatile food and fuel prices - has hovered around 6 percent due to elevated education and medical costs.

In its December policy statement, the RBI forecast headline inflation at 3.8 percent to 4.2 percent in the six months starting April, not very far from its medium-term target of 4 percent.

Consumer prices rose 2.2 percent in December, the slowest pace in 18 months and below the RBI's October-to-March forecast range of 2.7 percent to 3.2 percent.

The biggest take away from the policy on Thursday is that this marks the beginning of a fresh rate cut cycle after a prolonged period of rate pause and the MPC wants the markets to understand that.

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Dr Ravindra H. Dholakia, Dr Pami Dua, Dr Michael Debabrata Patra and Shri Shaktikanta Das voted in favour of rate cut decision while Dr Chetan Ghate and Dr Viral V. Acharya voted to keep the policy rate unchanged.

In a tweet, Economic Affairs Secretary Subhash Chandra Garg welcomed the rate cut and stance change, saying the MPC had come up with a "balanced and pragmatic policy statement".

The committee ignored the inflationary impact of the interim budget, choosing to not look at many off-balance sheet items even as RBI Governor Shaktikanta Das told mediapersons that the bank would always be data-driven.

Patel's exit prompted some to fret the RBI's independence was under threat, but some economists argued that Thursday's decision should not be read as a surrender to pressure.

Earlier, when Urjit Patel took charge as the RBI Governor, he shifted from the usual practice of announcement at 11 am and presented the fourth bi-monthly (his maiden) monetary policy review at 2:30 pm after the MPC meeting. "Both recent history and forward guidance make a compelling case for the rate cut". What all this means is that if inflation doesn't surprise on the upside, there will be more rate cuts going ahead.

The rupee weakened to 71.69 to the dollar immediately after the announced but strengthened soon after to 71.42.

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