The six-member Monetary Policy Committee
(MPC), headed by RBI Governor Shaktikanta Das
, on Thursday cut key policy rate by 25 basis points as falling inflation provided room for policy easing.
After the cut, the repo rate stood at 6.25 per cent. Likewise, the reverse repo rate adjusted to 6 per cent, and the marginal standing facility (MSF) rate and bank rate to 6.5 per cent.
Repo is the rate at which RBI lends to commercial banks, whereas reverse repo is the short-term borrowing rate at which the central bank borrows from other banks. The marginal cost of funds-based lending rate (MCLR) is the minimum interest rate below which a bank is not permitted to lend, barring a few exceptional cases permitted by RBI.
The headline inflation is projected to remain soft in the near term, reflecting the current low level of inflation and benign food inflation outlook
The MPC also changed the policy stance to ‘neutral’ from ‘calibrated tightening’. RBI said the decision to change the monetary policy stance was unanimous. “The shift in stance to ‘neutral’ would provide flexibility to meet growth challenges,” Das said.
MPC members Ravindra H Dholakia, Pami Dua, Michael Debabrata Patra and Shaktikanta Das voted in favour of the decision, while Chetan Ghate and Viral V Acharya voted to keep the policy rate unchanged.
Here is a look at the key takeaways from the money policy review:
> GDP: RBI projects GDP to expand at 7.4 per cent in 2019-20 – 7.2-7.4 per cent in H1, and 7.5 per cent in Q3 – with the risks evenly balanced.
> Liquidity: Das said RBI is continuously monitoring the liquidity situation and infusing liquidity as per requirement. Credit flow to industries remained muted in October-December. “We do not want to prejudge the liquidity situation. The position is in surplus in February,” he said.
> Inflation: RBI says deflation in food items led to soft headline inflation. The central bank sees consumer price inflation at 2.4 during January-March and 3.2-3.4 per cent during April-September. The possibility of fiscal slippages is factored into the inflation projections, the governor said.
> Financial markets: According to RBI, global financial markets began the year on a calmer note after a turbulent December. Among advanced economies, the US equity market recovered from a sharp selloff in December, triggered by Fed’s monetary policy tightening, trade tensions and the government shutdown. Emerging stock markets, which declined in December on a slew of soft economic data, saw some gains on expectation of accommodative monetary policy stances in major economies. The 10-year yield in the US, which fell to a multi-month low in December, rose in January as crude oil prices edged up and risk sentiment turned positive, though softening of the Fed stance restricted the gains.
> Farm output: Agricultural output is expected to decelerate in FY19. Rabi sowing so far (up to February 1, 2019) has been lower than that in the previous year, but the overall shortfall of 4 per cent across various crops is expected to catch up as the season ends. Lower rabi sowing reflects a deficient northeast monsoon (44 per cent below the long period average). However, storage in major reservoirs – the main source of irrigation for the rabi season – stood at 44 per cent of the full reservoir level (as on January 31, 2019), which was marginally higher than that in the previous year. An extended period of cold weather this winter is likely to boost wheat yields, which would partly offset the shortfall, if any, in the area sown.