RBI cuts key rate by 0.25%; home, auto EMIS may drop

MUMBAI: After a 10-month pause, the Reserve Bank on Wednesday cut benchmark lending rate by 0.25 per cent to over 6-year low citing reduction in inflation risk, a move that will lower interest on home, auto and corporate loans.

The repo rate, at which RBI lends to banks, is now down to 6 per cent, the lowest in more than six-and-a-half years.

The reverse repo, at which RBI borrows from banks, has been readjusted accordingly by a similar percentage point to 5.75 per cent. The marginal standing facility (MSF) rate and the Bank Rate have also come down to 6.25 per cent.

RBI had last cut the key lending rate by 0.25 per cent in October 2016 monetary policy, Urjit Patel’s first as RBI Governor. That was also the first monetary policy which was decided by Monetary Policy Committee (MPC).

“The decision of the MPC is consistent with a neutral stance of monetary policy in consonance with the objective of achieving the medium-term target for consumer price index (CPI) inflation of 4 per cent within a band of +/2 per cent, while supporting growth,” Patel said after the third monetary policy review of the current fiscal by the 6-member MPC.

Despite a cut in the benchmark lending rate, RBI retained its GDP forecast to 7.3 per cent.

However, the stock market, which had largely factored in the cut, declined. While the BSE index Sensex slipped from record high to end 98.43 points lower at 32,476.74, NSE’S Nifty fell 33.15 points to 10,081.50.

On the rate of price rise, Patel said: “The MPC observed that while inflation has fallen to a historic low, a conclusive segregation of transitory and structural factors driving the disinflation is still elusive.”

Noting that the trajectory of inflation in the baseline projection is expected to rise from current lows, he said the MPC decided to keep the policy stance neutral and to watch incoming data.

The MPC remains focused on its commitment to keep headline inflation close to 4 per cent on a durable basis, he added.

It has also stressed on an urgent need to reinvigorate private investments, clear infrastructure bottlenecks and provide a major thrust to the Pradhan Mantri Awas Yojana for affordable housing.

RBI said it is working in close coordination with the government to resolve large stressed corporate borrowings and recapitalise public sector banks.

The banking sector in India is reeling under Rs 8 lakh crore of non performing assets (NPAS) or bad loans, of which PSU banks alone account for over Rs 6 lakh crore.

MUMBAI: The Reserve Bank on Wednesday said it will endeavour to keep retail inflation close to 4 per cent on a "durable basis" which may rise in the near term on account of pay commission payouts and price adjustments post GST rollout.

"The MPC observed that while inflation has fallen to a historic low, a conclusive segregation of transitory and structural factors driving the disinflation is still elusive.

"The MPC remains focused on its commitment to keeping headline inflation close to 4 per cent on a durable basis," the central bank said in its 3rd bi-monthly monetary policy statement, 2017-18.

The RBI'S Monetary Policy Committee (MPC) on Wednesday decided to reduce the repo rate -- at which it lends to banks -- by 0.25 per cent to 6 per cent.

Going forward, as base effects fade, the inflation momentum is to be hinged upon the impact of house rent allowance (HRA) under the Central Pay Commission (7th CPC), price revisions withheld ahead of the Goods and Services (GST) rollout as well as disentangling of structural and transitory factors shaping food inflation, the apex bank said.

The regulator has set a medium-term target for consumer price index (CPI) based retail inflation at 4 per cent with a +/- bias of 2 per cent.

RBI Governor Urjit Patel said inflation trajectory now incorporates the first round impact of the implementation of the HRA awards of the 7th CPC by the central government.

"Excluding the HRA impact which will affect the CPI cumulatively, inflation would be a little over 4 per cent by fourth quarter as against 4.5 per cent inclusive of the HRA in the June statement (of RBI policy)," Patel said.

India's Cpi-based retail inflation stood at 1.54 per cent in June this year to hit its lowest reading in the series based to 2011-12. The MPC also noted that inflation is well below target in most of advanced and emerging market economies despite a modest rise in global demand as well as uptick in crude oil. Citing its survey on inflation, the RBI said households seem to have discounted the recent low inflation prints; their three months and one year ahead inflationary expectations polled in the RBI survey in June have "somewhat hardened".