MUMBAI: The all new Monetary Policy Committee has decided to make its debut with a bang, reducing benchmark rates by 0.25 per cent against the expectations of bankers and economists, who on Monday were almost unanimous in predicting no change in interest rates.
The RBI on Tuesday afternoon announced that the 6 member MPC had slashed rates by 0.25 per cent, bringing repo rate down to 6.25 per cent.
As unexpected as the move was, the RBI said all six members of the MPC voted for cutting the repo rate during its first policy review meeting, including new RBI Governor Urjit Patel.
With the latest cut, the Monetary policy regime in India stands at the softest since November 2010.
While the rate cut will bring cheer to markets, corporates and people with EMIs, who will all see interest rates on loans coming down, it might not be greeted with as much cheer by senior citizens and others who earn incomes through fixed and term deposits.
On inflation, which was held as one of the primary reasons against going for a rate cut in October, the RBI said that the forecast for Q4 FY17 inflation was 5.3 per cent with chance of upside risk.
"The Committee expects that the strong improvement in sowing, along with supply management measures, will improve the food inflation outlook,” RBI said.
"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 favourable base effect,” it added.
The RBI has placed its confidence on the rapidly improving monsoon situation and the decline in food inflation momentum. Both of these, it said would spur economic growth.
"The momentum of growth is expected to quicken with a normal monsoon raising agricultural growth and rural demand, as well as by the stimulus to the urban consumption spending from the pay commission’s award,” RBI said.
The RBI noted, however, that there were difficulties in achieving India's CPI inflation target of 4 per cent (plus or minus 2 per cent) due to the impact of the 7th Pay Commission, seasonality in food prices, fluctuation in international crude prices and the roll-out of the Goods and Services Tax from April 2017.
"By current reckoning, the pass-through of the goods and services tax (GST) will likely commence from April 2017 and last for about 12-18 months, going by the cross-country experience,” RBI stated, adding, "While the impact of the GST on CPI inflation would largely depend on the standard rate decided by the GST Council, almost 50 per cent of the CPI is expected to be exempt."
Markets reacted positively, with benchmark Sensex up 80.34 points and the broader NIFTY up 25.05 points half an hour after the announcement.