RBI cuts repo rate by 50 basis points to boost economy

GDP growth rate has also been reduced by the central bank

GN Bureau | September 29, 2015


#rbi   #raghuram rajan   #repo rate   #inflation   #gdp  


The Reserve Bank of India has cut the repurchase, or repo rate by 50 basis points to 6.75%, the lowest the key interest rate has been in four years. In a big boost for the markets and economy, RBI governor Raghuram Rajan today announced cut in repo rate by 50 basis points at the 4th Bi-monthly Monetary Policy statement for 2015-16. However, CRR (cash reserve ratio) remains unchanged at 4 per cent. The repo rate cut is more than what the experts were predicting.

However, the other cut is worrying. RBI has cut FY16 real GDP growth estimate to 7.4%. It expects growth to pick up towards the latter part of the fiscal.

The RBI has already eased the policy rate by 75 bps so far this year. The central bank will work with the government to remove impediments for banks (commercial banks) to pass on 125 bps rate cut to the consumers, said Rajan.

The RBI governor has been under pressure from the finance ministry as well as the industry to cut interest rate to spur economic recovery.

"Since our last review, the bulk of our conditions for further accommodation have been met. The January 2016 target of 6 per cent inflation is likely to be achieved. In the monetary policy statement of April 2015, the Reserve Bank said that it would strive to reach the mid-point of the inflation band by the end of fiscal 2017-18. Therefore, the focus should now shift to bringing inflation to around 5% by the end of fiscal 2016-17," the RBI said.

A rate cut is being seen as a key trigger to boost investment demand in an economy where credit growth has dipped to a multi-year low.

Expectations for a rate cut surged after the release of data showing consumer inflation at a record low of 3.66 per cent in August.

Inflation looks set to undershoot the government's projection of 6 per cent inflation by January 2016.

Indian industry is desperate for a pick-up in credit growth but has been hampered by a lack of monetary transmission of earlier cuts by banks, a point that Rajan has forcefully made to public sector banks. Bank, on their part, have turned cautious after a rising tide of stressed and non-performing assets, pushing back investment by domestic industry.

Rajan today said the inflation is expected to reach 5.8% in January 2016. It will stay below January 2016 target of 6% in FY16; will average 5.5% for FY17.

Concerns over inflation, though, remain. Rajan has made lowering inflation to sustenable levels a cornerstone of his governorship so far, and has largely succeeded in bringing down inflation levels to below the RBI’s own targets.

Retail inflation fell to a record low of 3.66% in August, and could well stay under Rajan’s self-imposed target of 6% by January 2016. However, the decline in prices has largely been driven by global factors such as a steep fall in oil and commodity prices.
 
But with a poor monsoon just over, the coming months could see prices jump again as the effects of a poor harvest kick in, wiping out the gains of a positive base effect of the past couple of months.
 
Additionally, the US Federal Reserve has hinted that a hiking of interest rates there is no longer an ‘if’ but a ‘when’. At a recent university address, US Fed chairperson Janet Yellen said the US central bank was on track to raise interest rates this year for the first time in nearly a decade. If that happens, it could see a sudden exit of foreign money from Indian markets, leading to turmoil on both equity and currency markets. This was acknowledged by the RBI today. "We pay attention to what Fed is doing," Rajan  said in the policy statement. Adding to global growth worries is the slowdown in China.

Full Report: click here

Comments

 

Other News

“Key milestones achieved in Assam”

In an interview with Governance Now, Anil Kumar Jha, special DGP, CID, Assam, who is also nodal officer for the CCTNS project, speaks of what the system in its present form has helped his state achieve. What is the current status of CCTNS in Assam and its outcome?

Crime tracking project: Bugged from the beginning

A stand-off between the ministry of home affairs (MHA) and software development firm Wipro seems to have long held up the Rs 2,000 crore crime and criminal tracking network and systems (CCTNS) project, conceptualised ten years ago. The project aims to digitise and connect all police stations in the country

Activists question displacement and dispossession of marginalised communities

Questioning the development model pushed ahead for profit oriented growth, social and political activists, academicians, financial analysts and civil society organisations are holding a three day confluence of Peoples’ Convention on Infrastructure Financing in Mumbai.     &nb

The enemy within

About one-fourth of India’s elderly face abuse at the hands of those they trust the most – the son (52%)  followed  by the daughter in law (34%),spouse/partner (14%), daughter(6%)  grandchild (6%), son in law(3%), parent(1%) and care giver(1%), reveals a report by the HelpAge Ind

Who has been investing in India through Mauritius?

The official statistics provided by the department of industrial policy and promotion (DIPP) under the ministry of commerce and industry shows that between January 2000 and December 2017, India received $368 billion of foreign direct investment (FDI). It also says that Mauritius was the source of $125 bill

The neighbour and the valley

The declaration communicated through the director general of military operations (DGMO) of Pakistan and India on May 29, 2018, to implement the ceasefire agreement of 2003 between the two countries in “letter and  spirit” has opened up an opportunity to restore peace in the disturbed Kashm

Current Issue

Current Issue

Video

CM Nitish’s convoy attacked in Buxar

Opinion

Facebook    Twitter    Google Plus    Linkedin    Subscribe Newsletter

Twitter