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Mumbai: Encouraged by softening inflation and fiscal consolidation roadmap by the government, RBI on Wednesday slashed key policy (repo) rate by 0.25 percent to 7.5 percent, the second such surprise rate cut outside regular policy review in less than two months.
It has been decided to "reduce the policy repo rate under the liquidity adjustment facility (LAF) by 25 basis points from 7.75 percent to 7.5 percent with immediate effect," RBI Governor Raghuram Rajan said in a statement.
The cut in the policy rate by RBI will help in lowering interest rate for individual and corporate borrowers.
It will thus make home, auto and corporate loans cheaper.
However, cash reserve ratio (percentage of deposits kept in government securities) has been left unchanged at 4 percent.
Rajan, in the statement, said softer readings on inflation are expected to come in through the first half of 2015-16 before firming up to below 6 percent in the second half.
"The fiscal consolidation programme, while delayed, may compensate in quality, especially if state governments are cooperative.
"Given low capacity utilisation and still-weak indicators of production and credit off-take, it is appropriate for the Reserve Bank to be pre-emptive in its policy action to utilise available space for monetary accommodation," he said.
Wholesale inflation for January, declined to a five-and-a-half year low of (-) 0.39 percent on falling prices of manufactured and fuel items, even though prices of food articles remained high.
Inflation measured by the wholesale price index (WPI) was at 0.11 percent in December. The data for November was revised downwards to (-) 0.17 percent, from the provisional estimate of zero.
However, food inflation witnessed a rising trend in January and scaled a six month high of eight percent, according to the government data released on Monday.
Besides, inflation in pulses, vegetables and cereals was higher in January over the previous month.
Commenting on RBI's move, Minister of State for Finance, Jayant Sinha said: "Rate cut will provide near term boost. Going forward the rate cycle will be driven by data."
Sinha hoped that going forward the macro economic data will provide further room for rate cut.
"We will see EMIs come down," he added.
Chief Economic Advisor Arvind Subramanian said the government and the RBI have a shared assessment of economic outlook.
Growth will pick up in the coming months, inflation is on downward trend, and government's fiscal consolidation is well on target, he added.
In the policy statement, Rajan said further monetary actions will depend on incoming data, especially on easing of supply constraints, improved availability of key inputs such as power, land, minerals and infrastructure, continuing progress on high-quality fiscal consolidation.
Besides, the pass through of past rate cuts into lending rates, the monsoon and developments in international environment will also decide further rate actions.
State Bank of India chairperson Arundhati Bhattacharya said, "We welcome the repo rate cut by RBI. With government embarking on a path of qualitative fiscal consolidation and the formal adoption of inflation targeting, inflation trajectory is expected to stay benign and will aid banks in their decision-making.
Our bank will take an appropriate call of a cut in base rate by looking at all evolving circumstances."
The RBI is scheduled to announce its next bi-monthly policy statement on April 7.
"Going forward, the RBI will seek to bring the inflation rate to the mid-point of the band of 4 +/- 2 percent provided for in the agreement, i.E., to 4 percent by the end of a two year period starting fiscal year 2016-17," Rajan said.
He said the Budget has "valuable structural reforms embedded" in it which will help improve supply over medium term.
"In the short-run, however, the postponement of fiscal consolidation to the 3 percent target by one year will add to aggregate demand.
"At a time of accelerating economic recovery, this is, prima facie, a source for concern from the standpoint of aggregate demand management, especially with large borrowings intended for public sector enterprises," Rajan said.
In the Budget, the government had delayed the fiscal consolidation plan by a year to achieve the 3 percent fiscal deficit target by 2017-18.
As regards revision in base year for GDP calculation, Rajan said the Central Statistical Organisation is to be commended on the changes it has made to the methodology of estimating GDP, bringing India up to international best practice.
"The picture of a steadily recovering economy appears right," Rajan said.
The government estimates GDP to grow at 7.4 percent in the current fiscal and for next fiscal between 8-8.5 percent based on 2011-12 base year.
First Published: Wednesday, March 4, 2015, 11:12
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