Setting the stage for a reduction in interest rates on personal, home and auto loans, the Reserve Bank of India (RBI) on Thursday slashed the main policy rate — Repo rate, or the interest rate at which the central bank lends funds to the banks — by 25 basis points to 6.25 per cent in a dovish monetary policy review while sounding sanguine on low inflation expectations.
The Monetary Policy Committee (MPC), headed by the RBI Governor Shaktikanta Das, also decided to change the monetary policy stance from ‘calibrated tightening’ to ‘neutral’, indicating that there could be further softening of the rates in the future. It was widely expected ahead of Thursday’s meeting that the MPC may not tinker with the policy rate but could restrict the changes to a shift in its stance to ‘neutral’.
The decision to change the monetary policy stance was unanimous. However, on the reduction in the policy repo rate, MPC members Ravindra H. Dholakia, Pami Dua, Michael Debabrata Patra and Shaktikanta Das voted in favour of the decision. Chetan Ghate and RBI Deputy Governor Viral V. Acharya voted to keep the policy rate unchanged.
When asked about the transmission of the Repo rate cut to the customers, Das said, “we will discuss with the banks. It’s for the banks to decide on the lending rates.” Banks are expected to announce a cut in lending rates in the coming weeks.
While headline inflation, led by food inflation has been benign, continuing high levels of core inflation — the non-food, non-fuel component of inflation — had led to the expectation that the RBI might stop short of cutting rates and restrict itself to a change in stance in the first policy review by Shaktikanta Das as the Governor. In a significant departure from previous policy reviews, there was an emphasis on the need to support growth if inflation objectives are achieved and the MPC noted that the slack in the economy is rising. The first policy document of the new RBI Governor talks about the slowdown in global economic activity and mute domestic credit flow.
“Headline inflation is projected to remain soft in the near term reflecting the current low level of inflation and the benign food inflation outlook. Beyond the near term, some uncertainties warrant careful monitoring,” Das said after unveiling the policy on Thursday. The policy panel revised the consumer price inflation downwards to 2.8 per cent in the fourth quarter of 2018-19 but projected it to rise to 3.2-3.4 per cent in the first half of 2019-20 and 3.9 per cent in the third quarter 2019-20, with risks broadly balanced around the central trajectory.
The RBI also projected a GDP growth of 7.4 per cent – in the range of 7.2-7.4 per cent in the first half — for 2019-20 and 7.5 per cent in the third quarter.
The policy panel also listed several uncertainties and risks. “Vegetable prices have been volatile in the recent period; reversal in vegetable prices could impart upside risk to the food inflation trajectory. Secondly, the oil price outlook continues to be hazy. Thirdly, a further heightening of trade tensions and geo-political uncertainties could also weigh on global growth prospects, dampening global demand and softening global commodity prices, especially oil prices,” the RBI said.
The MPC said the unusual spike in the prices of health and education needs to be closely watched. “Financial markets remain volatile. The monsoon outcome is assumed to be normal; any spatial or temporal variation in rainfall may alter the food inflation outlook,” the MPC said.
“Several proposals in the union budget for 2019-20 are likely to boost aggregate demand by raising disposable incomes, but the full effect of some of the measures is likely to materialise over a period of time,” Das said.
Listing reasons for the rate cut, Das said, “inflation in items of rural consumption such as firewood and chips, which had remained sticky and at elevated levels, has collapsed in recent months.”
“Electricity prices also showed an unexpected moderation, providing a softer outlook for the fuel group. While inflation excluding food and fuel remains elevated, the recent unusual pick-up in the prices of health and education could be a one-off phenomenon. The crude oil price outlook remains broadly the same as in the December policy,” he said.
The Reserve Bank’s surveys show that inflation expectations of households as well as input and output price expectations of producers have moderated significantly. Finally, the effect of the HRA increase for central government employees has dissipated completely along expected lines. Taking into consideration these developments and assuming a normal monsoon in 2019, the RBI said.
Going forward, several factors will shape the inflation path. “Food inflation has continued to surprise on the downside with continuing deflation across several items and a significant moderation in inflation in cereals. Several food groups are experiencing excess supply conditions domestically as well as internationally. Hence, the short-term outlook for food inflation appears particularly benign, despite adverse base effects. Secondly, the moderation in the fuel group was larger than anticipated,” it said.
While announcing his last monetary policy review, former RBI Governor Urjit Patel, hinting that conditions are gradually changing and they await more robust inflation signals and data points to consider any change in the policy, had said, “if the upside risks we have flagged do not materialise or are muted in their impact as reflected in incoming data, there is a possibility of space opening up for commensurate policy actions by the MPC.”
📣 The Indian Express is now on Telegram. Click here to join our channel (@indianexpress) and stay updated with the latest headlines