Economy

RBI cuts repo rate in first policy review under new governor

RBI cuts repo rate in first policy review under new governor

Shaktikanata Das-led Reserve Bank of India (RBI) has reduced its lending rate by 0.25 per cent to 6.25 per cent with the monetary policy committee voted 4:2 in the favour of a rate cut.

It can be noted that the RBI had hiked rates twice in quick succession in 2018 but has been cutting its inflation projections ever since, leading to the rate cut Thursday-the first since the middle of 2017. The 'repo rate is a key interest rate at which the Central Bank lends short-term funds to commercial banks.

RBI has decided enhancement of collateral free agriculture loan from Rs 1 lakh to Rs 1.6 lakhs. One, there will likely be a series of rate cuts from this point and the cumulative impact will considerably put pressure on banks to pass on the benefit to the end-consumer. "Investment activity is recovering but supported mainly by public spending on infrastructure". There is a need to strengthen private investment activity and buttress private consumption. The central bank had maintained the status quo in the last two Monetary Policy Committee meetings.

There are few worry lines, both in the industrial sector, as well as the rural economy.

The committee though flagged external headwinds including trade tensions, and crude oil prices, which though appear well-behaved now.

"The extended period of cold weather in this year's winter is likely to boost wheat yields, which would partly offset the shortfall, if any, in area sown", it said.

The inflation rate is estimated at 3.2-3.4% in the first half of the year 2019-20 and 3.9% in the third quarter of 2019-20, he said.

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India's retail inflation declined from 3.4 per cent in October 2018 to 2.2 per cent in December, well below the bank's target of four percent.

Crude oil prices have also moderated sharply over the last six weeks, which could push down headline inflation rate even further.

"While inflation excluding food and rule remains elevated, the recent unusual pick-up in the prices of health and education could be a one-off phenomenon", the statement said.

The surprise 25 basis points rate cut to 6.25 per cent is a measure to broad base credit growth across all the sectors of the economy that's gathering more steam now, the governor said.

"Inflation in the prices of farm inputs and industrial raw materials remain elevated, despite some softening".

All said, it was a refreshingly straightforward and pragmatic monetary policy review bringing in perhaps a new era of more elaborate communication from the central banks, now in India just after Fed also started press conference at every FOMC meet.