The newly minted Monetary Policy Committee, led by new RBI Governor Urjit Patel, noted that while some inflation related concerns remain, measures to ease food inflation and a good monsoon have given space for a rate cut
CHENNAI: The newly formed Monetary Policy Committee of the RBI debuted with a bang on Monday, announcing a repo rate cut of 25 basis points (0.25%), bringing it down to 6.25 per cent from 6.5 per cent. The RBI Governor Urjit Patel led panel’s move has brought down the repo rate to the lowest since November 2010.
Markets and industry both reacted positively to the development, with Sensex and NIFTY closing 91.26 points and 31.05 points higher respectively.
The MPC’s move is a marked departure from predecessor Raghuram Rajan’s policy stance, which had a strong emphasis controlling inflation.
While the MPC too noted that there were concerns that inflation might be impacted by the implementation of the seventh pay commission and other factors, the panel chose to reduce rates, unanimously, citing the easing expected in food inflation due to a much better monsoon and the government’s moves to cool food inflation.
It also warned that weak global demand and dampened private investment posed risks to growth during the next fiscal year.
“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, as indicated in the third bi-monthly monetary policy statement,” Patel said, while announcing the rate cut.
“The Committee expects that the strong improvement in sowing, along with supply management measures, will improve the food inflation outlook,” RBI added, stating that the sharp drop in inflation reflects a downward shift in the momentum of food inflation.
The move is in line with the RBI moving towards a more accommodative stance, likely driven by the new monetary policy framework, under which the RBI has to target 4% medium-term inflation (+/- 2%). “The accommodative stance of monetary policy and comfortable liquidity conditions should support a revival of credit to the productive sectors,” RBI said. Patel did note that there remained risks of inflation creeping up in the short term.
“There are issues related to upside risks to inflation,” he stated, pointing out that the direct impact of House Rent Allowance due to second round impact of pay panel award on retail inflation will be looked at.