After keeping the policy repo rate steady for nine months, the Monetary Policy Committee (MPC) delivered a 25-basis points cut, citing lower inflation, normal monsoon and a smooth rollout of the Goods and Services Tax.
The repo rate (at which banks borrow funds from the Reserve Bank of India to overcome short-term liquidity mismatches) is now at 6 per cent, against 6.25 per cent earlier.
While four members of the MPC were in favour of the decision to cut by 25 basis points, one voted for a 50-basis points cut and another preferred status quo on the rate.
Even as the repo rate was pared, the MPC, expecting the inflation trajectory to rise from its current lows, chose to keep the policy stance neutral.
Following the repo rate cut, banks will weigh the possibility of a cut in deposit and lending rates this month-end.
“Banks have already passed on the previous rate cuts to customers; further action will be examined now,” said Rajeev Rishi, Chairman, Indian Banks’ Association.
With several factors — implementation of farm-loan waivers, the GST after-effects, the timing of implementation of salary and allowance revision by the State governments — contributing to uncertainty around the baseline inflation path, the MPC emphasised its commitment to keeping the headline inflation close to 4 per cent on a durable basis, said RBI Governor Urjit Patel.
“What we have done is taken a calibrated policy decision based on the out-turns and the projections going forward, and we felt that a 25-basis points cut, while keeping the stance neutral, was something that we should be doing at this juncture,” he added.
The markets (equity, government securities and forex) had already discounted the repo rate cut. The BSE Sensex closed down 0.30 per cent at 32,476.74.
Yield on the benchmark 10-year government security edged up two basis points even as its price came down 14 paise over the previous close.
Yield and price of a government security are inversely correlated.
Rupee at two-year high The rupee strengthened by 37 paise to close at a two-year high of 63.70 per dollar solely on account of huge dollar inflows.
To a question on banks’ likely response to the cut, Patel said: “Two or three things are clear. One, on fresh lending the transmission has been much stronger, especially in segments where there is lot of competition (housing loans and personal loans where non-banking finance companies play a big part).”
Secondly, he added, “when it comes to loan portfolio that is tied up on account of base rate and liabilities of a longer nature, the transmission has been slower. Given the liquidity conditions prevailing and the fact that we have reduced the policy rates by a substantial amount since the easing cycle started, I think there is scope for banks to reduce lending for those segments that have so far not benefited to the full extent of our... rate cuts.”
Other regulatory steps Additionally, the RBI announced a host of development and regulatory policy measures, including studying various aspects of the marginal cost of funds based lending rate system to improve monetary policy transmission; constituting a task force on public credit registry, which can help banks in credit assessment and pricing of credit as well as in making risk-based, dynamic and countercyclical provisioning.
The RBI will introduce tri-party repos to ensure better liquidity in the corporate bond repo market, providing markets an alternative repo instrument. A repo (ready forward) contact is an instrument for borrowing funds by selling securities with an agreement to repurchase the securities on an agreed future date at an agreed price.
Commenting on the MPC decision, Subhash Garg, DEA Secretary, said: “We welcome the... cut... as an important step necessary to converge toward the appropriate real monetary conditions for sustained growth consistent with India’s potential and for stable, moderate inflation.”