Published: Fri, February 08, 2019
Business | By Pearl Harrison

Monetary Policy: RBI cuts key policy rate to 6.25%

Monetary Policy: RBI cuts key policy rate to 6.25%

Ahead of the policy, opinion was divided on whether RBI would cut rates and economists had cited many reasons for the central bank to stay put; the budget was expansionary and easing would put pressure on prices, RBI's policy stance of "calibrated tightening" and the fact that banks needed to attract Rs 20 lakh crore of deposits to fund credit needs according to a Crisil report.

The reverse repo rate, too, was lowered to 6%, and the bank rate to 6.25%.

The MPC also changed its stance to "neutral" from the "calibrated tightening" adopted in October meet previous year.

The central bank has maintained status quo on interest rate in its last three bi-monthly monetary polices after hiking the repo rate twice this fiscal by 25 basis points each.

Das, in his maiden monetary policy review, has moved away from the usual practice of announcement 2:30 pm.

The six-member MPC, headed by Reserve Bank of India Governor Shaktikanta Das, began its meeting on Tuesday and announced its decision on Thursday.

Commenting on the RBI rate cut, Ankur Dhawan- Chief Investment, said "Industry was expecting a bigger rate cut than announced".

If inflation remains muted, Das hinted there is more room to cut rates, sounding a markedly more dovish tone from the central bank. With headline inflation around 4 percent, RBI may use policy space to boost growth.

Emboldened by a slowdown in inflation, the MPC under the new governor showed more concern about economic growth risks, paving the way for more rate cuts. However, all the members agreed on changing the policy stance to neutral. The next meeting of the committee is scheduled from April 2 to April 4.

At the committee's meeting, the first after Shaktikanta Das took over as the central bank's Governor, also changed its stance to "neutral" from the earlier "calibrated tightening".

The MPC made a decision to cut repo rate in a 4-2 split and unanimously change its stance from calibrated tightening to neutral.

The RBI revised the projection for Consumer Price Index inflation downward to 2.8% in the fourth quarter of 2018-'19 financial year.Retail inflation declined from 3.4% in October 2019 to 2.2% in December, which the RBI said was the lowest in the last 18 months.

Deviating from the practice of releasing the resolution of MPC in afternoon, the Reserve Bank of India (RBI) uploaded the policy statement it on its website at 11.45 am on February 7.

The RBI policy is a very dovish one and signals further rate cuts.

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