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RBI turns dovish, cuts repo rate to 6.25%: Key takeaways from policy meet

RBI Governor Shaktikanta Das | Photo-Dalip Kumar
The Reserve Bank of India (RBI) in its first policy meet under the new RBI chief Shaktikanta Das, decided to cut the repo rate by 25 basis points (bps) or 0.25 per cent to 6.25 per cent on Thursday. In line with expectations, the monetary policy committee (MPC) members also unanimously voted to change the policy stance to neutral whereas rate cut was voted 4-2. RBI Deputy Governor, Viral Acharya voted to keep the interest rates unchanged.

Gaurav Dua, Head of Research at Sharekhan by BNP Paribas, said the change in stance to “Neutral” and dovish commentary open doors for further rate cuts going ahead. The monetary policy support along with the fiscal stimuli of one trillion rupee in the Union Budget comes as a booster dose for the economy. 

Here're the key takeaways from the sixth bi-monthly monetary policy meet of RBI - 

Repo rate lowered by 25bps

The MPC reduced the policy repo rate by 25 basis points from 6.5 per cent to 6.25 per cent. As a result, the reverse repo rate stands adjusted to 6.0 per cent, and the marginal standing facility (MSF) rate and the Bank Rate to 6.5 per cent. In its February 5 report, news agency Reuters had said a softer stance would bode well for Prime Minister Narendra Modi’s government, which wants to boost lending and lift growth as it faces elections by May. 

Inflation outlook lowered

The MPC noted that retail inflation will remain soft in the near term. 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.

Dovish stance

Owing to benign inflation numbers, the central bank changed its policy stance to neutral from calibrated tightening, adopted in October policy meet last year under the then RBI Governor Urjit Patel. Giving the rationale behind the dovish stance, the MPC said that the output gap has opened up modestly as actual output has inched lower than potential. "Investment activity is recovering but supported mainly by public spending on infrastructure. The need is to strengthen private investment activity and buttress private consumption." 

GDP growth outlook

The GDP growth for 2019-20 is projected at 7.4 per cent – in the range of 7.2-7.4 per cent in H1, and 7.5 per cent in Q3 – with risks evenly balanced, it said in its press release. 

Viral Acharya votes for status quo on rates

Dr Ravindra H. Dholakia, Dr Pami Dua, Dr Michael Debabrata Patra and Shri Shaktikanta Das voted in favour of rate cut decision while Dr Chetan Ghate and Dr Viral V. Acharya voted to keep the policy rate unchanged. The minutes of the MPC’s meeting will be published by February 21, 2019.

Expert Take

Anuj Puri, Chairman - ANAROCK Property Consultants.

RBI’s decision to slash the repo rate by 25 basis point to 6.25 per cent is a welcome and unexpectedly positive move, given the sops that the recent expansionary budget gave to farmers at an additional cost of Rs 75,000 crore per annum. It definitely augurs well for the real estate sector which also received a budget bonanza in the previous week.  

Dhiraj Relli, MD & CEO, HDFC Securities

The RBI MPC has delighted market participants by changing stance to neutral and cutting repo rate by 25 bps. Q3FY20 inflation expectation cut to 3.9 per cent means some more rate cuts can be expected in the course of the next few meetings. While Bond yields are yet to respond to the rate cut, we think they may start to fall materially when FPIs revise their short term view on India (overcoming their fears on fiscal situation). Equity markets could rise some more, welcoming an attempt to address recent issues in the credit markets, ultimately leading to higher growth.

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