The Reserve Bank of India’s monetary policy committee, on Thursday, did the sensible thing — lowering the central bank’s overnight lending or “repo” rate from 6.25 to 6 per cent. This is the second successive rate reduction in the present RBI governor, Shaktikanta Das’s, tenure. In its last February review, the MPC had both cut the repo rate by 25 basis points and also changed its policy stance from “calibrated tightening” to “neutral”. The economic rationale for this monetary dovishness — relative to the approach of the previous governor — is sound. The monetary policy stance of the US Federal Reserve and other major central banks has turned distinctly dovish in recent times, following a loss of momentum in global economic growth.
The RBI cannot afford to be different, especially when year-on-year consumer price index (CPI) inflation is currently just 2.6 per cent and the MPC has itself revised downwards its projection for April-September to 2.9-3 per cent, from the 3.2-3.4 per cent range in February. Even after the latest cut, the real repo rate for India — six per cent minus 3 per cent CPI inflation — would still probably be the highest in the world. The real interest rates are even higher if one were to take the one-year marginal cost of the funds-based rate of 8.55 per cent being charged by the State Bank of India to its best borrowers. That being said, the MPC has very rightly not gone in for a sharper lowering of rates now. The headline CPI inflation is, no doubt, well below the RBI’s target of 4 per cent. However, “core” inflation, which excludes food and fuel, for February, was 5.4 per cent. That, plus global weather agencies forecasting an El Nino event that can potentially impact the upcoming southwest monsoon rains, is reason for not going overboard.
