RBI had said that it will be tracking inflation levels, monsoon and the Federal Reserve's policy stance to decide its stance for a policy rate cut.
RBI has cut the repo rate by 50bps to 6.75% in the fourth bi-monthly monetary policy. The cash reserve ratio, however, has been left unchanged at 4%.
RBI had said that it will be tracking inflation levels, monsoon and the Federal Reserve's policy stance to decide its stance for a policy rate cut.
According to the RBI monetary policy statement, here's why the central bank went for a 50bps rate cut on Tuesday:
- While global growth has moderated since the August policy, especially in emerging markets, global trade has deteriorated, downside risks have increased, however, the central bank has said that "In India, a tentative economic growth is underway, but is still far from robust."
- Inflation has dropped to a nine-month low, as projected. Wholesale inflation dropped to a new all-time low of -4.95% from the earlier historic low of -4.05%. Retail inflation too fell to a new low of 3.66% from the earlier 3.78%. CPI inflation excluding food and fuel eased in August for the second consecutive month, primarily due to the decline in petrol and diesel prices pulling down inflation in transportation. The RBI said that despite a deficit in the monsoons, food inflation pressures have been contained by various actions taken by the government to manage supply. The disinflation has been broad-based and inflation excluding food and fuel has also come off its recent peak in June.
- Area under sowing has expended modestly from a year ago period, the central bank has said. The RBi has said that first advance estimates indicate that food grain production is expected to be higher than last year, reflecting actions taken to contain the adverse effects of rain deficiency through timely advisories and regular monitoring of seed and fertiliser availability.
- In the last FOMC meet, the US Federal Reserve yet again postponed its decision to normalise the policy regime to later this year. When the US Fed hikes rates (if at all) it will be the first time that the Fed will be hiking rates in about a year, a stance that is being keenly watched by central banks around the world. RBi governor Raghuram Rajan in the monetary policy press conference on Tuesday said that "the US Fed's stance is one of the factors considered for the monetary policy."
- While lending rates have only falled by about 30bps which is only a fraction of the 75bps that has been cut in this year alone. However, RBI has said that bank deposit rates have been reduced significantly, suggesting that a further transmission is possible.
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