Monetary Policy: RBI cuts key policy rate to 6.25%

Explained Why the RBI's decision to cut repo rate comes as a surprise

Reserve Bank of India Governor Shaktikanta Das interacts with the media at the RBI office in New Delhi

This is the first time the repo rate has been cut since August 2017.

The cut is welcome news for Prime Minister Narendra Modi's government, which wants to boost lending and lift growth as it faces elections by May.

Assuming a normal monsoon in 2019, headline inflation estimates are revised downwards to 2.8 per cent in Q4, FY19, 3.2-3.4 per cent in the first half of FY20 and 3.9 per cent during the third quarter of FY20, with risks broadly balanced around the central trajectory. The Federal Reserve has changed direction, and now many analysts expect no USA rate hikes this year, after four in 2018. Most polled respondents expected the central bank to only change the stance, to neutral.

Deputy Governor Viral Acharya and another MPC member, Chetan Ghate, voted for status quo in interest rates, while Das and three others voted for a cut in interest rates.

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

"Every monetary policy committee member can and should have an independent view", she said.

Analysts say India needs to regularly record growth of at least eight percent to generate employment for the millions entering the workforce each year.

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Commenting on the RBI rate cut, Ankur Dhawan- Chief Investment, said "Industry was expecting a bigger rate cut than announced".

"On the basis of an assessment of the current and evolving macroeconomic situation at its meeting today, the Monetary Policy Committee (MPC) made a decision to reduce the policy repo rate under the liquidity adjustment facility (LAF) by 25 basis points from 6.50% to 6.25% with immediate effect", the RBI said in a statement. Last week it unveiled an expansionary budget, which included $13 billion of consumer stimulus ahead of an election.

India's retail inflation declined from 3.4 per cent in October 2018 to 2.2 per cent in December, well below the bank's target of four percent.

"Turning to the growth outlook, GDP growth for 2018-19 in the December policy was projected at 7.4 per cent (7.2-7.3 per cent in H2) and at 7.5 per cent for H1:2019-20, with risks somewhat to the downside", the RBI said in a statement.

"In the 12-month horizon, if we see that inflation remains at 3.9 or maximum of 4 percent or below, then I think there is a room to act", Das told reporters after Thursday's decision.

Falling food prices have been the main driver of the inflation slowdown, though the core measure - which excludes food and fuel costs - remains elevated at around 6 per cent.

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