RBI cuts key lending rate by 25 basis points; loans likely to get cheaper: Highlights of Monetary Policy Statement

07 February 2019 14:56 India Desk

The Reserve Bank of India (RBI) on Thursday cut benchmark lending rate by 0.25% to 6.25% on expectation of inflation staying within its target range, a move that may make home and other loans cheaper.

The RBI, under its new Governor Shaktikanta Das, changed the monetary policy stance to 'neutral' from the earlier 'calibrated tightening', signalling further softening of rates if inflation remain benign.

With Deputy Governor Viral Acharya and another member Chetan Ghate voting for a status quo, Das and three others outvoted them for reduction in repo rate to 6.25% from the existing 6.50%.

Accordingly, reverse repo was reduced to 6% from 6.25%.

Repo rate is the rate at which commercial banks borrow money from the RBI; while reverse repo rate is the rate at which RBI collects money from banks.

The RBI cut its estimates on headline inflation which cooled off to an 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.

"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 that it needs 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 with achieving the medium-term objective of maintaining inflation at the 4% level while supporting growth, it said.

"The need is to strengthen private investment activity and buttress private consumption," the resolution said, noting that investment activity is recovering, supported mainly by public spending on infrastructure.

It can be noted that a cut in rates can make loans cheaper and can boost investment activities in the economy.

The RBI expects GDP growth to be at 7.4% in FY20, which is up from the 7.2% estimated for FY19 by the CSO.

The interim budget proposals for FY20 will boost aggregate demand by raising disposable incomes, but the full effect of the measures will take time to play out, the MPC said.

The resolution said recent unusual pick-up in the prices of health and education services could be a one-off phenomenon, adding that the crude oil price outlook remains broadly the same as in the December policy.

The RBI had hiked rates twice in quick succession, in June and August, last year fearing an increase in inflation and also changed the stance of policy to 'calibrated tightening' from 'neutral' earlier.

Das was appointed as RBI Governor in December after the surprise resignation of Urjit Patel amid a feud with the government over policy measures.

Before the presentation of the interim budget, a majority of analysts were expecting higher chances of a rate cut or at least a shift in stance to 'neutral'.

A cool-down in headline inflation for December to an 18-month low of 2.19% was one of the major reasons for their expectations.

With provisions like a Rs 70,000-crore basic income scheme for farmers, the central government budget deviated marginally from the fiscal consolidation path by announcing a slip in FY19 and pegging the gap at a higher 3.4% for FY20.

This was called inflationary by many analysts, leading to greater expectations of pause by the RBI under the new governor.

The government is also expecting the RBI to deliver an interim dividend for the second year running at Rs 28,000 crore, which is likely to be taken up for discussion at RBI's next board meet.

On the regulatory policies front, the RBI proposed relaxations on foreign borrowings by companies undergoing insolvency resolutions to pay off the local lenders, redefined bulk deposits as those above Rs 2 crore from the earlier Rs 1 crore, align risk weights of bank loans to NBFCs with their ratings rather than a blanket 100% earlier and also harmonise categories of NBFCs.

Following are 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 Rs 2 crore and above from Rs 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 Rs 1.6 lakh from Rs 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.

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