In the first monetary policy review by the newly set up Monetary Policy Committee (MPC) as well as by new Governor Urjit Patel, the Reserve Bank of India (RBI), on Tuesday cut repo rate (the short-term lending rate charged by the central bank on borrowings by commercial banks) by 25 basis points (bps) to 6.25% with immediate effect.
"The decision of the MPC is consistent with an accommodative stance of monetary policy in consonance with the objective of achieving consumer price index (CPI) inflation at 5% by fourth quarter of 2016-17 and the medium -term target of 4% within a band of plus or minus 2%, while supporting growth," the RBI said in a release.
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 18 October 2016. The decision to cut repo rate is expected to bring much expected relief to commercial banks and corporates.
With repo rate reduced to 6.25%, the reverse repo rate under the liquidity adjustment facility (LAF) will now be 5.75%. Subsequently, the marginal standing facility (MSF) rate and the bank rate are adjusted to 6.75%.
Commenting on the RBI's fourth monetary policy review, Arundhati Bhattacharya, Chairman of State Bank of India (SBI), the country's largest lender, said, "The Committee decision to cut Repo rate by 25 bps was on the expected lines. 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."
Talking about outlook, the central bank statement says, "The Committee expects that the strong improvement in sowing, along with supply management measures, will improve the food inflation outlook. It notes that the sharp drop in inflation reflects a downward shift in the momentum of food inflation – which holds the key to future inflation outcomes – rather than merely the statistical effects of a favourable base effect. The Government has announced several measures to cool food inflation pressures, especially with regard to pulses. These measures should help in moderating the momentum of food inflation in the months ahead. This has opened up space for policy action, as indicated in the third bi-monthly monetary policy statement. The easy liquidity conditions engendered by the Reserve Bank’s operations should also enable the smooth transmission of the policy action through various market segments. Furthermore, banks should find added impetus for better transmission by the recent downward adjustment in small savings rates. 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 fuller play of these factors will need vigilance to prevent a generalised cost spiral from taking root."
"On balance, the Committee envisages a trajectory taking headline CPI inflation towards a central tendency of 5% by March 2017, with risks tilted to the upside albeit lower than in the second and third bi-monthly monetary policy statements of June and August respectively," it added.
The Reserve Bank expects the momentum of growth to quicken with a normal monsoon raising agricultural growth and rural demand, as well as by the stimulus to the urban consumption spending from the pay commission’s award. It says, "The accommodative stance of monetary policy and comfortable liquidity conditions should support a revival of credit to the productive sectors. The continuing sluggishness in world trade and the smaller terms of trade gains than in the past point, however, are leading to further slackening of external demand going forward. Accordingly, the projection of growth of real gross value added (GVA) for 2016-17 is retained at 7.6%, with risks evenly balanced around it."
VS Parthasarathy, Chief Financial Officer (CFO) of Mahindra Group, says, "This policy was a window into the thoughts of the Governor and the MPC. It is not only about the here and now, it is also about what the MPC thinks about risks and importantly it reveals the Governor's thoughts on structural matters. The focus will be on non-performing assetst (NPAs), financial market reforms, and financial inclusion for MSME. The policy has however stuck to monetary aspects and we have to wait to see the Governor's actions elsewhere. We trust he would continue to be vigilant, watching over the economic landscape with flexibility to act as the situation changes."
According to Anuj Puri, Chairman & Country Head of JLL India, the first question that arises after this rate cut is, of course, how it will help improve buyer sentiment in the housing sector. "The reason why housing sales have been sluggish is because of trust deficit between consumers and developers. Unless RERA and other pro-consumer policies come into play, buyers will continue to be wary. Therefore, we can expect only a marginal improvement in sentiment on the back of this rate cut. At this point, there is also no ready answer to the question of to what extent banks will actually pass on the benefit of the rate cut to borrowers," he added.
Here are the latest policy rates following MPC review…
Reverse Repo Rate........5.75%