Rajan goes halfway, cuts repo rate

Encouraged by low inflation, crude prices and the govt’s commitment to adhering to fiscal deficit target

GN Bureau | January 15, 2015




Two weeks after bankers meet and few days after encouraging IIP (index of industrial production) at 3.8% in November, the Reserve Bank of India suprised many on Thursday by making an unscheduled announcement on cut in repo rate by 25 basis point.

Recalling its assurance made during fifth bi-monthly monetary policy statement of December which stated that “if the current inflation momentum and changes in inflation expectations continue, and fiscal developments are encouraging, a change in the monetary policy stance is likely early next year”, RBI on Thursday finally made changes in the repo rate by slashing it by  25 basis points to 7.75 per cent from 8 percent.


However, the RBI decided keep cash reserve ratio (CRR) of scheduled banks unchanged at four per cent of net demand and time liabilities (NDTL). A change in monetary policy was not expeted as the central bank has a scheduled policy review meeting on February 3.

With visible signs of inflation slowing down in last few months and government coping to control fiscal deficit, the move was much desired. Post announcement RBI governor Raghuram Rajan in a statement said “Since July 2014, inflationary pressures (measured by changes in the consumer price index) have been easing. The path of inflation, while below the expected trajectory, has been consistent with the assessment of the balance of risks in the Reserve Bank’s bi-monthly monetary policy statements.”

 “To some extent, lower than expected inflation has been enabled by the sharper than expected decline in prices of vegetables and fruits since September, ebbing price pressures in respect of cereals and the large fall in international commodity prices, particularly crude oil. Crude prices, barring geo-political shocks, are expected to remain low over the year. Weak demand conditions have also moderated inflation excluding food and fuel, especially in the reading for December. Finally, the government has reiterated its commitment to adhering to its fiscal deficit target,” the statement said.


“These factors have significantly reduced the momentum of inflation, compensating for the widely anticipated ending of favourable base effects. Households' inflation expectations have adapted, and both near-term and longer-term inflation expectations have eased to single digits for the first time since September 2009. Inflation outcomes have fallen significantly below the 8 per cent targeted by January 2015. On current policy settings, inflation is likely to be below 6 per cent by January 2016,” the RBI said.

What is Repo Rate?
Repo rate or repurchase rate is the rate at which banks borrow money from the central bank (RBI for India) for a short period by selling their securities (financial assets) to the central bank with an agreement to repurchase it at a future date at predetermined price. It is similar to borrowing money from a money-lender by selling him something, and later buying it back at a pre-fixed price. The reduction in the repo rate makes the borrowing for the banks cheaper and banks have more money which they can use for lending.

 

Mood lifter, says CII

Commenting on policy announcement  Chandrajit Banerjee, Director General, CII said that the 25 bps reduction in repo rate has come as a positive surprise in the new year and would be a huge mood lifter for investors who have been grappling with subdued demand conditions.

“Going forward, CII hopes that while maintaining a delicate balance between growth and inflation, the RBI would shift its stance in favour of growth, given that the trend in inflation is clearly subdued. CII would call for a further cut in policy rates by at least 25 basis points in the forthcoming monetary policy,” added Banerjee.

Comments

 

Other News

BMC took nearly 48 days in resolving one complaint

The number of civic complaints with BMC has increased from 61,910 in 2015 to 92,329 in 2017, which is 49% in two years. A report titled ‘Civic Issues Registered by Citizens and Deliberations done by Municipal Councillors in Mumbai’ released by Praja Foundation has found some interesting facts a

Who is Atishi Marlena?

Atishi Marlena is among the nine AAP functionaries who were dismissed by the union home ministry asserting that their posts were created without the approval of the centre. Marlena, served as education advisor of the Aam Aadmi Party (AAP)-led government in Delhi. While she was intrumental in improving the

Leadership? Learn it from Jaising, Ambani, Doshi

The Fortune magazine has named three Indians – lawyer Indira Jaising, industrialist Mukesh Ambani and architect Balkrishna V Doshi – among the world’s greatest fifty leaders.

Energy as the new value system for redesigning daily life

Remember Kardashev scale? For the uninitiated, it’s a method of measuring a civilization’s level of technological advancement, based on the amount of energy it is able to use for communication. We will get to its unconventional relevance to the big urban questions at the end, but just keep it a

48 MLAs, MPs have declared cases of crime against women

Out of 1580 MPs and MLAs with criminal cases, 48 (three MPs and 45 MLAs) have declared cases related to crime against women. The Association for Democratic Reforms (ADR) and

A rare peek into the mind of Modi

It’s always lonely at the top. Prime minister Narendra Modi’s marathon townhall event at the Central Hall Westminster, titled ‘Bharat ki Baat, Sab ke Saath’, was nothing but his way of shedding that loneliness, communicating and mingling with people and showing his vulnerable side.

Current Issue

Current Issue

Video

CM Nitish’s convoy attacked in Buxar

Opinion

Facebook    Twitter    Google Plus    Linkedin    Subscribe Newsletter

Twitter