The Reserve Bank of India (RBI) on Tuesday cut repo rate by 25 bps to 6.25 per cent. Reverse repo rate under the LAF stands adjusted to 5.75 per cent, and the marginal standing facility (MSF) rate and the Bank Rate to 6.75 per cent. All six members of the monetary policy committee voted in favour of cutting repo rate.
In its policy statement, the central back said that the decision of the monetary policy committee was consistent with the accommodative stance of the monetary policy. Retail inflation is expected to be 5 per cent by March 2017 with upside risk.
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Tuesday’s policy review was Urjit Patel’s maiden announcement as RBI Governor. This was the central bank’s fourth bi-monthly policy statement for the year 2016-17.
The policy was announced in the afternoon against the existing practice of 11 am.
Earlier, former RBI Governor Raghuram Rajan had the final say on interest rate cut decisions. Patel now has to go by the advice of a newly set up six-member monetary policy committee (MPC). This is for the first time that decision-making on interest rates has shifted to the six-member panel which has equal representation from RBI and the government.
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Since January last year, the RBI has cut the repo-rate – the rate at which RBI lends to banks – five times. India’s retail inflation has touched a five-month low of 5.05 percent in August, triggering hopes of a rate cut. The RBI and the government have set a retail inflation target of four percent for the next five years with an upper tolerance level of six percent and lower limit of two percent. Mounting bad loans will remain another focus area of Patel’s debut policy review.
Rajan has set a deadline of March 2017 for banks to clean up their balance sheets. Patel has to ensure that there is no let-up on this cut-off date.