RBI Policy: MPC cuts repo rate by 25 basis points to 6.25%

RBI Policy: MPC cuts repo rate by 25 basis points to 6.25%

Four of six members of the MPC voted to cut the rates, while all six voted for a change in the stance.

India's central bank cut interest rates on Thursday, giving a surprise boost to Prime Minister Narendra Modi ahead of general elections due this year.

The lower repo rate-the rate at which banks borrow from the RBI- has raised hopes of bringing down EMIs for the millions of home loan borrowers as well cut capital raising costs for corporates, with banks expected to pass on the reduced rates to its customers.

RBI Governor Shaktikanta Das cut the interest rate by 0.25 percent to 6.25 percent, a move that will lead to reduction of lending rate by banks leading to lower EMI for housing, vehicle loan and corporate borrowers. This was the first monetary policy review for the former economic affairs secretary, who took over as RBI Governor in the second week of December 2018.

The RBI also eased bank lending restrictions for non-banking finance companies and raised the limit on "collateral free" farm loans in an attempt to boost lending to almost 120 million rural households. "Investment activity is recovering supported mainly by public spending on infrastructure", RBI Governor said. This is the first policy statement issued by the RBI under its newly appointed governor Shaktikanta Das. "The need is to strengthen private investment activity and buttress private consumption", said the MPC.

"Looking beyond the current year, the growth outlook is likely to be influenced by. aggregate bank credit; and overall financial flows to the commercial sector continue to be strong, but are yet to be broad-based", the MPC said.

Trade tensions and associated uncertainties appear to be moderating global growth, the bank said.

Headline inflation will likely persist within the RBI's tolerable level of 4 percent. Taking into consideration key factors such as lower food inflation, moderation in the fuel group, recent unusual pick-up in the prices of health and education, crude oil prices outlook and moderation in inflation expectations of households, the CPI inflation is revised downwards to 2.8 per cent in fourth quarter of 2018-19 and 3.2-3.4 per cent in first half 2019-20 and 3.9 per cent in third quarter of 2019-20, with risks broadly balanced around the central trajectory. "We thought that the oil had just eased after the October policy, it was not prudent to withdraw the tightening policy stance right away in December itself", Acharya said.

The six-member monetary policy committee voted 4:2 in favour of the rate cut, while the decision to change policy stance was unanimous.