History is created: RBI governor and MPC cut interest rates

 

The  Reserve Bank of India (RBI) on Tuesday cut repo rate by 25 bps to 6.25%, the reverse repo rate under the LAF stands adjusted to 5.75%, and the marginal standing facility (MSF) rate and the Bank Rate to 6.75%.  All six members of the monetary policy committee voted in favour of cutting repo rates.

 

Tuesday’s policy review was Urjit Patel’s debut  announcement as RBI Governor. This was the central bank’s fourth bi-monthly policy statement for the year 2016-17.The policy was announced in the afternoon as opposed to the traditional  practice of 11 am. The interest rate was today cut by 0.25%  to six-year low of 6.25% in a unanimous decision by the new rate-setting panel MPC.

 

 

The cut, first in six months, came amidst big clamour for easing rates especially after the departure of former Governor Raghuram Rajan, who was often accused of stifling growth by keeping rates too high.

 

The 6-member Monetary Policy Committee, headed by Patel, reduced repo rate or the short term rate at which central bank lends to banks, to 6.25%. Consequently, the reverse repo rate has also come down by a similar percentage point to 5.75%.

 

 

The move will lead to reduction of lending rate by banks leading to lower EMI for housing, car loan and corporate borrowers. "The decision of the MPC is consistent with an accommodative stance of monetary policy in consonance with the objective of achieving consumer price index (CPI) inflation at 5% by Q4 of 2016-17 and the medium-term target of 4% within a band of +/- 2 per cent, while supporting growth," RBI said in the fourth bi-monthly monetary policy review.

 

For the first time in the history of the 81-year old Reserve Bank of India (RBI), a committee of six and not just the RBI governor decided on these rates.  In agreement with ex-governor Raghuram Rajan and Urjit Patel's recommendations to form a monetary policy committee (MPC), the government had earlier named three academics to join RBI governor Patel, his deputy in charge of monetary policy and another central bank executive on the new MPC.

 

 

Indian Statistical Institute Professor Chetan Ghate, Delhi School of Economics director Pami Dua and IIM-Ahmedabad professor Ravindra Dholakia and the three RBI nominees jointly decided and had one vote each.

 

 

 

The previous RBI governor Rajan was often accused of keeping borrowing costs too high and hurting growth; the MPC will be guided by the inflation target set by the government last month. It has to ensure that consumer inflation stays within 2- 6%.

 

There were some expectations that Patel will go for a cut in interest rate on easing inflation. The Reserve Bank has reduced the interest rate by 150 basis points since January 2015 with an aim to boost economic growth.

 

 

On a contrary note, credit rating agency Ind-Ra said in a recent report that the central bank was more likely to cut rates in December this year as it was of the opinion that the RBI would have better clarity on the retail inflation trajectory for the last quarter of the fiscal as well as the US electoral outcomes and the Federal Reserve rate trajectory by then.

 

 

 

In the last bi-monthly policy review in August, the RBI had kept the policy repo rate (the interest rate at which the central bank provides short-term liquidity to banks) under the liquidity adjustment facility unchanged at 6.5%. The RBI then reasoned that the risks to the inflation target of 5% for March 2017 continued to be on the upside.