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Last Updated : Mar 05, 2015 03:17 PM IST | Source:

RBI cuts repo rate 25 bps, says govt on right fiscal path

In a surprise move, the Reserve Bank of India (RBI) today cut the benchmark repo rate by 25 basis points to 7.5 percent. Analysts said the out-of-cycle interest-rate cut confirms the central bank has definitively embarked on its much-awaited easing cycle.

Moneycontrol Bureau

In a surprise move, the Reserve Bank of India (RBI) today cut the benchmark repo rate by 25 basis points (0.25 percent), from 7.75 percent to 7.5 percent. Consequently, the reverse repo rate moved down to 6.5 percent. The central bank kept the cash-reserve ratio unchanged at 4 percent.

Analysts said the out-of-cycle interest-rate cut (the RBI meets once in two months to review monetary policy, with the next meeting scheduled on April 7), which follows another 25 basis points cut in January, confirms the central bank has definitively embarked on its much-awaited easing cycle.

The repo rate is the rate at which the central bank lends to commercial banks while the cash reserve ratio is amount of their net liabilities they need to keep in cash.

In a statement, RBI governor Raghuram Rajan said the move was prompted by the recent fall in consumer inflation, recorded at 5.1 percent in January, as well as the recent Union Budget, which had “structural reforms embedded in it” -- even though it extended the timeline to bring down the central government’s fiscal deficit to 3 percent from two years to three.

The central bank’s decision put to rest concerns that it may frown upon the government’s decision to aim to reduce its fiscal deficit for 2015-16 by a small-than-earlier-stated quantum (from 4.1 percent in FY15 to 3.9 percent versus 3.6 percent targeted earlier).

Dr Rajan said that in the Budget, the government had expressed a desire to clean up “legacy issues, which gave a misleading picture of the true extent of fiscal rectitude”.

The governor welcomed the government’s decision to give states a higher share from the total tax pool, spend more on infrastructure, focus on reducing subsidy leakages via technology, all of which he said suggested the actual fiscal consolidation may be higher than was suggested in the headline deficit number.

The RBI is targeting consumer inflation to stay at about 6 percent in January 2016, as it has outlined for a long time now.

Beyond that, as was agreed upon in a recent agreement between the government and the central bank recently, the latter would formulate monetary policy with a stated intention to keep inflation at about 4 percent with a deviation of 2 percent either side.

“This (signing of the monetary policy frwamework agreement) makes explicit what was implicit before – that the government and the Reserve Bank have common objectives and that fiscal and monetary policy will work in a complementary way,” the RBI chief said.

'Rate cut to boost economy, mkts'

"Coming on the back of a growth-oriented Budget, the unexpected cut in headline interest rate by the RBI sends a huge positive signal that the central bank and the government are working in tandem to provide a robust scaffolding to growth, even while not losing sight of inflation,” Chandrajit Banerjee, Director General of the Confederation of Indian Industry, said.

Bankers told CNBC-TV18 that their asset liability management committees (ALCOs) should meet this week to take a call on whether and how much they should reduce lending rates by.

A fall in lending rates would help boost consumer sentiment and spur spending on products such as automobiles, Mahindra & Mahindra CFO VS Parthasarathy said. He added that the immediate fall in bond yields would also ease borrowing costs for corporates.

The central bank’s rate cut also gave a boost to equities, with the Indian stock market benchmark Sensex testing the 30,000 level for the first time ever, before it gave up gains.

“This is a positive surprise and it will make people buy the market. We can see the market tracking higher quite easily on the back of what has happened here,” JPMorgan’s Adrian Mowat said.

First Published on Mar 4, 2015 08:55 am
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