RBI: Repo rate reduced by 25 basis points

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Deputy Governor Viral Acharya and another MPC member, Chetan Ghate, voted for status quo in interest rates, while Shaktikanta Das and three others voted for a cut in interest rates. The repo rate is the rate at which the central bank lends short-term money to the banks.

The last rate cut was announced in August 2017 and was followed by two hikes of 25 bps each past year.

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.

No surprises, no twists, transparent and extensive communication - both in policy documents as well as at the press conference - that is how one need to look at today's Reserve Bank of India (RBI) Monetary Policy Committee (MPC) review.

"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", it added. Also, the collateral free lending limit for agriculture has been increased to Rs 160,000 from Rs 100, 000 earlier, which is positive for consumption. This is the first policy statement issued by the RBI under its newly appointed governor Shaktikanta Das. However, it remains to be seen if the banks will quickly pass on the benefits of the rate cut to the borrowers.

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"Investment activity is recovering but supported mainly by public spending on infrastructure", the MPC said in a statement. The RBI also revised down headline inflation estimates to 2.8 per cent in March quarter, 3.2-3.4 per cent in first half of next fiscal and 3.9 per cent in Q3 of FY20.

"First, aggregate bank credit and overall financial flows to the commercial sector continue to be strong, but are yet to be broad-based". Oil prices and the lagged impact of the recent depreciation of the Indian rupee could be a drag on net exports while slowing global demand could pose headwinds.

Trade tensions and associated uncertainties appear to be moderating global growth, the bank said. This could allow the RBI more elbow room to lower lending rates, eventually bringing down borrowing costs for individuals and corporate houses.

The MPC reduced the policy repo rate by 25 basis points from 6.5 per cent to 6.25 per cent. "Growth in rural wages moderated in October", RBI said.

India's central bank on Thursday unexpectedly lowered interest rates and, as anticipated, shifted its stance to "neutral" to boost a slowing economy after a sharp slide in the inflation rate.

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