RBI cuts repo rate by 25 bps to 6.25%

All 6 members voted in favour of monetary policy decision. Next meeting of MPC scheduled on December 6-7

The Reserve Bank of India today cut policy rate (repo rate) by 25 basis points to 6.25% from 6.5% citing easing inflation.

In its first meeting, the Monetary Policy Committee (MPC) on Tuesday all members of policy decided for 25 basis point rate cut. 

This was the fourth bi-monthly monetary policy of the RBI. It was first monetary policy statement after Urijit Patel took over as governor on September 04, 2016. 

On the basis of an assessment of the current and evolving macroeconomic situation MPC decided to reduce the policy repo rate under the liquidity adjustment facility (LAF) by 25 basis points from 6.5% to 6.25% with immediate effect.

Consequently, the reverse repo rate under the LAF stands adjusted to 5.75%, and the marginal standing facility (MSF) rate and the Bank Rate to 6.75%. 

RBI in a policy statement said the decision of the MPC is consistent with an accommodative stance of monetary policy in consonance with the objective of achieving consumer price index (CPI) inflation at 5% by Q4 of 2016-17. The medium-term target is four% within a band of +/- 2%, while supporting growth.

Retail inflation for the month of August softened to 5.05%. Many analysts say the headline number would fall further to around 4% or even below that, which would be the MPC’s mandate of keeping inflation at around the central point of 4%, with a band of 2% on either side. 

In a poll of 10 economists, bankers and market participants by Business Standard, six had expected the RBI to maintain status quo. 

The MPC members met for two days on Monday and Tuesday before announcing their decision at 2.30 pm. The minutes of the meetings are expected to be published 14 days from now. 

The Committee expects that the strong improvement in sowing, along with supply management measures, will improve the food inflation outlook. 

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 said.