RBI makes surprise cut in interest rate, home loans could get cheaper

Anna Jefferson
February 8, 2019

Inflation estimates have been revised very sharply lower by the central bank, according to a Livemint report. Deputy Governor Viral Acharya and another MPC member, Chetan Ghate, voted for status quo in interest rates, while Shaktikanta Das and three others voted for a cut in interest rates.

"On the basis of an assessment of the current and evolving macroeconomic situation at its meeting today, the Monetary Policy Committee (MPC) chose to reduce the policy repo rate under the liquidity adjustment facility (LAF) by 25 basis points from 6.50% to 6.25% with immediate effect", the RBI said in a statement. However, a change in policy stance from "calibrated tightening" to "neutral" was approved unanimously by the members.

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These decisions are in consonance with the objective of achieving the medium-term target for consumer price index (CPI) inflation of 4 per cent within a band of 2 per cent up or down, while supporting growth, the MPC said in a statement. "The shift in stance from calibrated tightening to neutral provides flexibility to address, and the room to address, sustained growth of India's economy over the coming months as long as inflation remains benign". The RBI has forecast inflation to be in the range of 3.2-3.4 per cent in April-September 2019, lower than its earlier prediction of 3.8-4.2%. However, growth is said to be slowing down in the second half of the fiscal. The Bank of Thailand kept its key rate unchanged on Wednesday after hiking in December, while the Philippines also held on Thursday. The Federal Reserve has changed direction, and now many analysts expect no US rate hikes this year, after four in 2018.

Asked whether banks would reduce rates in response to RBI's signal, Das said he would be meeting the chiefs of banks within the next fortnight and raise the issue of monetary policy transmission. Mr Patel had led the MPC to raise interest rates twice a year ago.

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Sonal Varma, chief India economist at Nomura, believes that the stance needs to be aligned with changing risks globally and locally. "But there should be consistency in views over a period of time".

The Monetary Policy Committee (MPC) on February 7 changed its stance to neutral from calibrated tightening as expected, but what came as a surprise to the Street was a rate cut of 25 bps which most global brokerages think is just the beginning of easy monetary policy cycle. With headline inflation around 4 percent, RBI may use policy space to boost growth.

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