ET View: A cautious welcome for the repo rate cut

08 February, 2019, 09:41 | Author: Kevin Carter
  • RBI Policy MPC Cuts Benchmark Rate RBI Governor Emphasises Growth

The RBI's monetary policy committee (MPC) meeting - the first for RBI Governor Shaktikanta Das - for the sixth bi-monthly monetary policy review for 2018-19 started on February 5, and the resolution of the MPC will be announced after 11:45am on February 7.

The RBI cut its estimates on headline inflation which cooled off to a 18-month low of 2.2 per cent in December for the next year, and expects the number to come at 2.8 per cent in March quarter, 3.2-3.4 per cent in first half of next fiscal and 3.9 per cent in third quarter of FY20.

Explaining the rationale for the rate cut, Das said it was "vital to act decisively and in a timely manner to address the objective of growth once price stability as defined (in RBI's inflation-targeting mandate) is achieved". "The rate cut is also driven by the fact that inflation has significantly surprised on the downside". The Bank of Thailand kept its key rate unchanged on Wednesday after hiking in December, while the Philippines also held on Thursday. However, all the members agreed on changing the policy stance to neutral.

Bonds gained, and the rupee declined 0.2 per cent immediately after the rate move.

RBI Governor Shaktikanta Das said, "we are constantly & continuously monitoring the liquidity situation and based on the requirement we will ensure that there is no liquidity scarcity".

The cut is welcome news for Prime Minister Narendra Modi's government, which wants to boost lending and lift growth as it faces elections by May.

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Deputy Governor Viral Acharya and another MPC member, Chetan Ghate, voted for status quo in interest rates, while Das and three others voted for a cut in interest rates.

"Every monetary policy committee member can and should have an independent view", she said.

The RBI's Monetary Policy Committee has reduced repo rate reduced by 25 basis points to 6.25 from 6.5 per cent.

The monetary stimulus is what PM Modi's government needs to stoke growth in an election year. It also stayed below RBI's inflation target of 4 per cent for five consecutive months.

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.

Thus far in the current calendar year 2019, Nifty Auto index has underperformed the market by falling 7 per cent mainly due to moderate volume growth on account of challenges like higher insurance costs and lower financing available.

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