RBI Slashes Repo Rate by 25 Basis Points, Changes Stance to 'Neutral'

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The Monetary Policy Committee's unanimous decision to shift the policy stance from calibrated tightening to neutral is entirely welcome. The reverse repo rate stands adjusted to 6.0 per cent, and the marginal standing facility rate and the bank rate has been kept 6.5 per cent.

The MPC also chose to change the monetary policy stance from calibrated tightening to neutral.

But the decision, in a split vote that saw four members of the MPC vote in favour of a 25 basis point cut in the repo rate, deserves a more cautious welcome.

Das, in his maiden monetary policy review, has moved away from the usual practice of announcement 2:30 pm. The RBI has thus cut rate for the first time in 17 months since August 2017.

"Investment activity is recovering but supported mainly by public spending on infrastructure".

The repo rate is the rate at which the Reserve Bank lends short-term money to the banks, while the reserve repo rate is the rate at which the central bank borrows money from commercial banks. "It also signals a commitment to a symmetric policy to achieve its 4 per cent inflation target - a departure from the RBI's previous one-sided, conservative stance that aimed to keep inflation below the target."- Abhishek Gupta, Bloomberg Economics.

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Developed economies too are altering stance, with the Reserve Bank of Australia governor this week shifting to neutral.

The RBI cut its estimates on headline inflation which cooled off to a 18-month low of 2.2 per cent in December for the next year, and expects the number to come at 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 third quarter of FY20. The governor, however triggered concerns of back-tracking on the central bank's move to peg retail loans to an external benchmark from April 2019, by referring to RBI's earlier circular as a discussion paper.

The rate cut continues a trend in which some major central banks, anxious about slowing global growth and helped by cooling inflation, have moved firmly away from last year's tightening moves or tones. MPC members Viral Acharya and Chetan Ghate voted against a rate cut.

RBI Governor Shaktikanta Das said, "we are constantly & continuously monitoring the liquidity situation and based on the requirement we will ensure that there is no liquidity scarcity".

Deviating from the practice of releasing the resolution of MPC in afternoon, the Reserve Bank of India (RBI) uploaded the policy statement it on its website at 11.45 am on February 7. The governor also indicated that there was scope for further rate cuts this year if prices do not rise.

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