RBI policy review under Shaktikanta Das: Repo rate eases policy rate to 6.25%; changes stance to neutral

The Reserve Bank of India (RBI) on Thursday cut repo rate by 25 points to 6.25%. The central bank has also changed its monetary policy stance to "neutral" from "calibrated tightening" as inflation stood below the central bank’s 4% target.

The policy statement is the first under newly appointed RBI governor Shaktikanta Das, who took charge in December last year following sudden exit of Urjit Patel.

In the first policy review under Governor Shaktikanta Das, the six-member Monetary Policy Committee voted 4:2 in favour of the rate cut, while the decision to change policy stance was unanimous.

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

Benchmark interest rate was cut by 0.25% to 6.25%, a move that would result in lower cost of borrowing for the banks that are expected to transmit the same to individuals and corporates.

"Headline inflation is projected to remain soft in the near term, reflecting the current low level of inflation and the benign food inflation outlook,” the MPC resolution said, adding "we need to be watchful of vegetable prices, oil prices, trade tensions, health and education inflation, financial market volatility and monsoon outcomes".

The rate cut is in consonance of achieving the medium term objective of maintaining inflation at the 4% level while supporting growth, it said.

The RBI's monetary policy committee (MPC) began its three-day meet on Tuesday to decide on key rates amid expectations that it may change its policy stance to 'neutral' from 'calibrated tightening' on low inflation footprint, even as a rate cut was ruled out by many experts.

Some of the highlights of the sixth bi-monthly monetary statement for 2018-19 by the RBI:

• RBI cuts key lending rate (repo) by 0.25% to 6.25%
• Reverse repo rate cut to 6%, bank rate to 6.5%, CRR unchanged at 4%
• Headline inflation estimates revised down to 2.8% in March quarter, 3.2-3.4% in first half of next fiscal and 3.9% in Q3 of FY'20
• Projects GDP growth to accelerate to 7.4% next fiscal, from 7.2% in 2018-19
• Pegs April-September growth in range of 7.2-7.4%, and 7.5% in Q3 of 2019-20
• Oil price outlook hazy, trade tensions to weigh on global growth prospects
• Union budget proposals to boost demand by raising disposable incomes
• To revise definition of bulk deposits as single rupee deposits of ₹2 crore and above from ₹1 crore currently
• To issue guidelines to harmonise major categories of NBFCs
• Proposes to set up a task force on Offshore Rupee Markets to ensure Rupee value stability
• Removes restrictions on Foreign Portfolio Investors investing in corporate debt market
• To come out with discussion paper on Payment Gateway Service Providers and Payment Aggregators
• Hikes limit of collateral-free agricultural loans to ₹1.6 lakh from ₹1 lakh, to help small and marginal farmers
• Constitutes Working Group to review agricultural credit
• Monetary policy committee votes 4:2 in favour of rate cut, unanimous on change in stance
• 2 MPC members Chetan Ghate and Viral Acharya were for status quo in rates
• Next meeting of the MPC from April 2-4.