Rate cut by RBI

Why in news?

The Monetary Policy Committee (MPC) of the Reserve Bank of India (RBI) in its bimonthly review of monetary policy has cut the repo rate by 25 basis points to 6%.

What is the rationale?

• The rate cut was widely expected after many data releases suggested a slowing economy.
• Consumer price inflation had hit record low numbers. Food inflation had turned negative.
• However, some of the upside risks to inflation have either reduced or not materialised.
• Suppressed urban demand implies that companies do not have great pricing power.
• The Index of Industrial Production and Purchasing Managers’ Index (PMI) for manufacturing were also not optimistic.
• The high levels of stress that continue to be reflected in the balance sheets of both lenders and corporate borrowers does not seem to have scope for new investments.

What caution has RBI taken?

• The MPC’s statement said that the decision was in keeping with a neutral monetary policy stance.
• The MPC has chosen to be cautious by cutting rates only by 25 basis points and not by 50 basis points or more as was demanded.
• This is because MPC expects the trajectory of inflation to rise from current lows amid many uncertainties.
• A conclusive separation of “transitory and structural factors” impacting price gains remains vague.
• These factors include fluctuating prices of food items, farm loan waivers by states, salary and allowance increases as per seventh pay panel recommendations, etc.
• The MPC acknowledges that there are moderating forces at work. 

1. a second successive normal monsoon that could check food costs.
2. a stable international commodity price outlook that could help keep the inflation trajectory favourable.

What lies before the governments?

• The onus is now on the Centre and the States to take steps through policy measures and fiscal actions.
• The Centre and State governments should move forward and make speedier clearance of projects to boost investments.
• They should find resolution forthe bad loans crisis to make the rate cut fruitful.

Source: Business Standard