India Cuts Repo Rate to a 6-Year Low of 6.25%


The Reserve Bank of India lowered its repurchase rate by a surprise 25bps to 6.25 percent on October 4th, 2016, saying the stance of monetary policy remains accommodative and the decision will help to bring inflation rate back to central bank's 4 percent target in the medium-term while supporting growth. India’s consumer prices index rose 5 percent year-on-year in August, easing from its 6 percent increase in July. The repo policy rate is now at its lowest since November 2010.

The central bank also cut its reverse repo rate to 5.75 percent while it kept its cash reserve ratio at 4 percent.

Excerpts from the final review by Governor Urjit Patel:

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 per cent by Q4 of 2016-17 and the medium-term target of 4 per cent within a band of +/- 2 per cent, while supporting growth. 

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 7thpay commission award on house rent allowances, and the increase in minimum wages with possible spillovers 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 per cent by  March  2017,  with  risks  tilted  to  the  upside  albeitlower  than  in  the  second  and  third  bi-monthly monetary policy statements of June and August respectively.

The momentum of growth is expected 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. 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 smaller terms of trade gains than in the past point, however, 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 per cent, with risks evenly balanced around it.

Six members voted in favour of the monetary policy decision. 

India Cuts Repo Rate to a 6-Year Low of 6.25%


RBI | Joana Ferreira | joana.ferreira@tradingeconomics.com
10/4/2016 9:52:23 AM