RBI cuts repo rate by 0.25 per cent

Indicating a more benign approach towards repo rate than Raghuram Rajan’s, Reserve Bank of India (RBI) governor Urjit Patel’s slashed it by 25 basis points or 0.25 per cent on Tuesday. The move comes in the wake of declining inflation.

The slight cut in repo rate, the rate at which the RBI lends money to commercial banks, is unlikely to impact retail investors much. Industry has reason to feel happy that the new dispensation at the central bank is not hawkish.

According to the statement of the Monetary Policy Committee (MPC), “The Committee expects that the strong improvement in sowing, along with supply management measures, will improve the food inflation outlook. It notes that the sharp drop in inflation reflects a downward shift in the momentum of food inflation—which holds the key to future inflation outcomes—rather than merely the statistical effects of a favorable base effect. The government has announced several measures to cool food inflation pressures, especially with regard to pulses. These measures should help in moderating the momentum of food inflation in the months ahead. This has opened up space for policy action.”

The inflation concerned has not vanished, though. The factors could be, as the MPC has pointed out, “the 7th Pay Commission award on house rent allowances, and the increase in minimum wages with possible spillovers through minimum support prices.”

For the capital market, the RBI move came as a pleasant surprise. The Sensex closed 91.26 points or 0.3 per cent higher at 28,334.55, the Nifty rose 31.05 points or 0.4 per cent at 8,769.15.

The central bank is cautiously upbeat about growth and employment generation prospects: “While private investment activity remains sluggish, corporate business expectations remain upbeat in the Reserve Bank’s industrial outlook survey on improving prospects for production, capacity utilization, employment and the availability of finance. This positive sentiment was also reflected in business confidence surveys conducted by other institutions.”

Further, it said, “Over the medium-term, the implementation of the GST should boost business confidence and investment, brightening the environment for an acceleration of growth. Other initiatives such as steps to attract foreign direct investment in defence, civil aviation, pharmaceuticals and broadcasting, measures to improve infrastructure, and the enactment of the Insolvency and Bankruptcy Code and the Real Estate (Regulation and Development) Act should also contribute to unlocking entrepreneurial energies and growth impulses.”