RBI also adjusted the reverse repo rate by 0.25 per cent to 5.75 per cent.
According to RBI, normal monsoon and smooth rollout of GST gave room for rate cut.
As many as 17 of 20 market analysts who had participated in an ET survey had predicted a 25 bps rate cut.
Four of six MPC members, Chetan Ghate, Pami Dua, Viral V Acharya and Urjit R Patel were in favour of the monetary policy decision, while Ravindra H Dholakia voted for a policy rate reduction of 50 basis points and Michael Debabrata Patra voted for status quo.
Here are five key takeaways from the RBI third bimonthly policy:
Inflation is likely to rise from current lows going forward. Monetary Policy Committee believes headline inflation could climb by an additional estimated 100 basis points above the baseline over 18-24 months. High frequency indicators suggest that price pressures are building up in vegetables and animal proteins in the near months. However, there are some moderating forces at work. First, the second successive normal monsoon coupled with effective supply management measures may keep food inflation under check. Second, if the general moderation of price increases in CPI excluding food and fuel continues, it will contain upside pressures on headline inflation. Third, the international commodity price outlook is fairly stable at the current juncture.
Farm loan waivers by states may lead to fiscal slippages and undermine quality of public spending, entailing inflationary spillovers.
PROBLEM WITH TWIN BALANCE SHEET
Business sentiment polled in the manufacturing sector reflects expectation of moderation of activity in Q2 of 2017-18 from the preceding quarter. Moreover, high level of stress in twin balance sheets – banks and corporations – is likely to deter new investment.
RBI kept growth forecast unchanged at 7.3 per cent for the current fiscal. External demand conditions are gradually improving and should support the domestic economy, although global political risks remain significant. Keeping in view these factors, RBI projection of real GVA growth for 2017-18 has been retained at the June 2017 projection of 7.3 per cent.
Surplus liquidity conditions persisted in the system, exacerbated by front-loading of budgetary spending by the government. There was also some moderation in the pace of increase in currency in circulation (CiC) which is typical at this time of the year – as against the increase of Rs 1.5 trillion in CiC during the first two months of 2017-18, it was Rs 436 billion and Rs 95 billon during June and July, respectively. Normally, currency returns to the banking system in these months and is reflected in a decline in CiC. Consequently, the increase in CiC recorded this year reflects the sustained pace of remonetisation and the associated absorption of liquidity from the system. Surplus liquidity of Rs 1 trillion was absorbed through issuance of treasury bills (TBs) under the market stabilisation scheme (MSS) and Rs 1.3 trillion through cash management bills (CMBs) on a cumulative basis so far this financial year.
The decision of MPC is consistent with a neutral stance of monetary policy 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.
The next meeting of the MPC is scheduled on October 3 and 4, 2017.