While cutting the repo rate at which RBI lends money to banks by 25 basis points, the central bank said steps the government takes on food management will be critical in determining the inflation outlook
The Reserve Bank of India (RBI) on Wednesday cut repo rate (the rate at which the RBI lends money to banks) by 25 basis points to 7.50% from 7.75% with immediate effect. At the same time, the central bank has kept cash reserve ratio (CRR) unchanged at 4%.
Dr Raghuram Rajan, governor, RBI, in a statement said, "The need to act outside the policy review cycle is prompted by two factors. First, while the next bi-monthly policy statement will be issued on 7 April 2015 the still weak state of certain sectors of the economy as well as the global trend towards easing suggests that any policy action should be anticipatory once sufficient data support the policy stance. Second, with the release of the agreement on the monetary policy framework, it is appropriate for the Reserve Bank to offer guidance on how it will implement the mandate."
"Going forward, the RBI will seek to bring the inflation rate to the mid-point of the band of 4 +/- 2% provided for in the agreement, i.e., to 4% by the end of a two year period starting fiscal year 2016-17," Dr Rajan said in a statement.
Commenting on the rate cut, Arundhati Bhattacharya, Chairman, State Bank of India (SBI), the country's largest lender, said, "We welcome the repo rate cut by RBI. With the Government embarking on a path of qualitative fiscal consolidation and the formal adoption of inflation targeting, inflation trajectory is expected to stay benign and will aid banks in their decision making. Our bank will take an appropriate call of a cut in base rate by looking at all evolving circumstances."
The new CPI rebased to 2012 was released on 12 February 2015. Inflation in January 2015 at 5.1% as measured by the new index was well within the target of 8% for January 2015. Prices of vegetables declined and, hearteningly, inflation excluding food and fuel moderated in a broad-based manner to a new low. Thus, disinflation is evolving along the path set out by the Reserve Bank in January 2014 and, in fact, at a faster pace than earlier envisaged.
"The uncertainties surrounding any inflation projection are, however, not insignificant. Oil prices have firmed up in recent weeks, and significant further strengthening, perhaps as a result of unanticipated geo-political events, will alter the inflation outlook. Food prices will be affected by the seasonal upturn that typically occurs ahead of the south-west monsoon and, therefore, steps the government takes on food management will be critical in determining the inflation outlook," the central bank said.
Dr Rajan said, "Softer readings on inflation are expected to come in through the first half of 2015-16 before firming up to below 6 per cent in the second half. The fiscal consolidation programme, while delayed, may compensate in quality, especially if state governments are cooperative. Given low capacity utilisation and still-weak indicators of production and credit off-take, it is appropriate for the Reserve Bank to be pre-emptive in its policy action to utilise available space for monetary accommodation."
The reverse repo rate under the liquidity adjustment facility (LAF) will be changed to 6.50%, and the marginal standing facility (MSF) rate and the bank rate at 8.50% with immediate effect.
Reverse Repo Rate........6.50%