RBI reduces repo rate by 25 basis points to 6.25%

RBIBy Rohit Sharma


The Reserve Bank of India’s Monetary Policy Committee (MPC) Thursday reduced the repo rate under the liquidity adjustment facility (LAF) by 25 basis points from 6.5 per cent to 6.25 per cent. The MPC also decided to change the monetary policy stance from calibrated tightening to neutral.

Repo rate is the rate at which the central bank of a country lends money to commercial banks in the event of any shortfall of funds. Repo rate is used by monetary authorities to control inflation.

The reverse repo rate under the LAF stands adjusted to 6.0 per cent and the marginal standing facility (MSF) rate and the Bank Rate to 6.5 per cent. These decisions are in consonance 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 MPC said in a statement.

GDP growth for 2018-19 in the December policy was projected at 7.4 per cent (7.2-7.3 per cent in H2) and at 7.5 per cent for H1:2019-20, with risks somewhat to the downside. The Central Statistics Office (CSO) has estimated GDP growth at 7.2 per cent for 2018-19. Looking beyond the current year, the growth outlook is likely to be influenced by several factors. The GDP growth for 2019-20 is projected at 7.4 per cent – in the range of 7.2-7.4 per cent in H1, and 7.5 per cent in Q3 – with risks evenly balanced, it added.

“This is the perfect follow-up to the Budget Speech by Finance Minister Piyush Goyal, and this will not just enhance liquidity in the economy but also boost investment and give the economy a positive growth phase. The option for further rate cuts in forthcoming reviews remains an option, and I hope we will see more such ‘positive moves’ from the RBI. From a real estate perspective, this will impact home loan interest rates, and reduced EMIs are among the best harbingers of positive sentiment, leading up to further off-take of real estate across India.” Said Dr. Niranjan Hiranandani, President, NAREDCO & CMD Hiranandani Communities.

The MPC said it notes that the output gap has opened up modestly as actual output has inched lower than potential. Investment activity is recovering but supported mainly by public spending on infrastructure. The need is to strengthen private investment activity and buttress private consumption.

“This move will help in ensuring that the monetary policy is aligned with fiscal policy and keeping in mind the balance between supply and consumption. As for the sector, reduction in home loan rates will definitely boost sales and ensure regular cash flow. The decision of changing the MPC’s stance from calibrated tightening to neutral may welcome more positive changes in the forthcoming policies,” said Manju Yagnik, Vice Chairperson Nahar Group.

According to Parth Mehta, Managing Director, Paradigm Realty, “This cut by 25bps to 6.25% is in line with our expectations as there is a serious liquidity crunch faced by the banks and NBFC resulting in Dampening of an overall business environment. Since the inflation is in check cut is a logical move by RBI to induce required liquidity”.

“The reduction in the repo rate was expected given lower inflation numbers and to stimulate growth in an election year. The cut-down of repo rate has changed the current calibrated tightening to a neutral stance,” said Rohit Poddar, MD – Poddar Housing and Development Ltd.

Four members supported for a reduction in repo rate and two voted to keep policy unchanged. The next meeting of the MPC is scheduled from April 2 to 4, 2019.

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