Home Central Banks RBI Lowers Repo Rate As Voting Starts

RBI Lowers Repo Rate As Voting Starts

Stockholm (Ekonamik) – The Reserve Bank of India (RBI) lowered its policy repo rate by 25 basis points (bps) to 6% on Thursday, April 4th. The decision was reached by a two-thirds majority of the Monetary Policy Committee (MPC) after a review of macroeconomic conditions during meetings on the two previous days. The INR fell from US$ 0.015 to US$ 0.014 following the announcement.

Source: BIS

This was the second time since the beginning of the year that the RBI lowered its policy rate. At its February meeting the RBI had already lowered interest rates from 6.5% to 6.25%. According to the April Monetary Policy Report, inflation expectations of households remain on the downward path they have been on since May 2018. These expectations reflect actual developments in headline inflation which has itself “declined sharply since mid-2018, driven by the sustained fall in food inflation (even turning into deflation during October 2018-February 2019), the waning away of the direct impact of house rent allowances for central government employees, and more recently, by a sharp fall in fuel inflation.

“Global growth is slowing down, and this is also reflected in three successive downward revisions made by the IMF in its projection of global growth for 2019. Domestic GDP growth is also estimated to slow in 2018-19, with high frequency indicators suggesting slackening of urban and rural demand as well as investment activity. While bank credit is growing at 14.3 per cent, it is not broad-based. Bank credit to micro and small industries, which are critical to employment and exports, was flat (0.6 per cent) as also credit to medium industries (0.7 per cent). Growth projections for 2019-20 have accordingly been revised downwards from 7.4 per cent to 7.2 per cent,” said RBI Governor Das in the statement.

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“We were conscious of the fact that food inflation has undershot our projections in the last quarter of 2018-2019 and is revolving softly over the first half of next year. Also, we noticed that inflation excluding food and fuel has moved down from its trajectory in the first eight months of 2018-2019 and is now trending towards 5%. These are some of the factors that motivated us to lower the inflation projection,” commented Dr Patra, Executive Director at the RBI, regarding inflation uncertainty during an analyst call, following the Governor’s statement.

The decision takes place on a heavily charged political background as voting for India’s parliamentary election starts this week. Since the election of Prime Minister Modi, and particularly after Governor Raghuram Rajan left, the independence of the RBI has been questioned. “Most likely, there will be a rate cut following this one. The RBI is in easing mode and will look for whatever it can get to justify easing. There is enough on the data front to justify an ease if you are looking for one,” commented Jahangir Aziz, Chief EM Economist at J.P. Morgan on CNBC’s Central Bank Watch ahead of the meeting.

The RBI also acknowledged the decision of the Supreme Court to strike down its February circular on default resolution, which told banks to start the resolution process as soon as a borrower defaults on a term loan. The circular gave them 180 days to cure it, failing which the account would have to be referred to the National Company Law Tribunal (NCLT). Previous guidelines allowed lenders to start the resolution process after 60 days of default.

 

Filipe Wallin Albuquerque
Filipe Wallin Albuquerque
Filipe is an economist with 8 years of experience in macroeconomic and financial analysis for the Economist Intelligence Unit, the UN World Institute for Development Economic Research, the Stockholm School of Economics and the School of Oriental and African Studies. Filipe holds a MSc in European Political Economy from the LSE and a MSc in Economics from the University of London, where he currently is a PhD candidate.

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