India unexpectedly cuts key rate, changes stance to neutral

RBI interest rate,repo rate,GDP

The repo rate is the rate at which the Reserve Bank lends short-term money to the banks, while the reverse repo rate is the rate at which the central bank borrows money from commercial banks.

"On the basis of an assessment of the current and evolving macroeconomic situation at its meeting today, the Monetary Policy Committee (MPC) chose to reduce the policy repo rate under the liquidity adjustment facility (LAF) by 25 basis points from 6.50% to 6.25% with immediate effect", the RBI said in a statement.

In its December policy, the RBI had projected a GDP growth rate of 7.4% for 2018-19 (7.2-7.3% in the second half and 7.5% for the first half of 2019-20) with risks somewhat to the downside.

The Modi government has been pushing for a rate cut by the RBI as it looks to support growth by increasing credit offtake to key sectors of the economy.

Modi was swept to power in 2014 on a business-friendly manifesto that promised to shake up India's economy and boost jobs. Das didn't disappoint and has announced an eventful policy.

But data have raised questions about how successfully he has delivered on his pledges and polls suggest he faces atough re-election fight.

India's core inflation was pegged at around 5.7 percent in December. But a government report leaked last week showed unemployment at a 45-year-high of 6.1 percent in 2017-18. On August 2, 2017, the then RBI Governor Urjit Patel, RBI Deputy Governor Viral Acharya and members Chetan Ghate and Pami Dua voted for a 25 bps rate cut to 6 percent.

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Despite the cut the rupee edged up 0.1 percent against the dollar.

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 up or down, while supporting growth, the MPC said in a statement.

"Headline inflation is projected to remain soft in the near term reflecting the current low level of inflation and the benign food inflation outlook", the statement said, but cautioned that beyond the near term, some uncertainties warrant careful monitoring such as volatile vegetable prices, crude oil prices and trade tensions.

For April-September, the MPC lowered its projection on headline inflation to 3.2-3.4 percent from the 3.8-4.2 percent seen in December.

In the past, even when the RBI has signalled lower rates, this rate transmission never really happened because banks always found a way to ignore the central bank's policy cues.

The Reserve Bank of Australia, Bank of Korea and Bank of Thailand have also tempered their outlooks in recent weeks.

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