Monetary Policy: RBI cuts key policy rate to 6.25%

RBI interest rate,repo rate,GDP

The Reserve Bank of India on Thursaday cut the repo rate by 25 basis points to 6.25 percent and pegged the GDP for 2019-20 at 7.4 per cent

The panel also made a decision to change the monetary policy stance from "calibrated tightening" to "neutral".

The Reserve Bank of India (RBI) in its first policy meet under the new RBI chief Shaktikanta Das, chose to cut the repo rate by 25 basis points (bps) or 0.25 per cent to 6.25 per cent on Thursday.

The repo rate is the rate at which the Reserve Bank lends short-term money to the banks, while the reverse repo rate is the rate at which the central bank borrows money from commercial banks.

While four members of the MPC including Das voted for a rate cut, RBI deputy governor Viral Acharya and independent member Chetan Ghate, a professor at the Indian Statistical Institute were in favour of maintaining a status quo on rates.

The government was believed to be unhappy with the RBI over a number of issues, including its apparent reluctance to cut rates to stimulate the economy.

The government is already in an election mode.

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He was rewarded with a jump of eight slots to 12th position, just one place behind his compatriot Shannon Gabriel, who advanced one slot.

In the same breath, GDP growth for FY20 is projected at 7.4 per cent - in the range of 7.2-7.4 per cent in H1, and 7.5 per cent in Q3 - with risks evenly balanced. The rate cut, therefore is a bit of a surprise. With inflation well within the RBI's medium-term target, analysts will closely watch any announcement on the key lending rate - or repo rate - and signs of easing policy in the coming months. In its budget on February 1, the government doled out cash to farmers and tax cuts to middle-class families, at the cost of a wider fiscal deficit and larger borrowing. While RBI's mandate is price stability (targeting inflation), the RBI Act also says that it needs to do so "keeping in mind the objective of growth", Das said then to make his point.

The committee voted 4:2 to pare the repo rate by 25 basis points to 6.25 percent.

The MPC also trimmed its economic growth forecast, to 7.2-7.4 percent during April-September, from its previous 7.5 percent estimate.

Patel's exit prompted some to fret the RBI's independence was under threat, but some economists argued that Thursday's decision should not be read as a surrender to pressure.

The Reserve Bank of India headed by a new chief, Shaktikanta Das, will probably drop its hawkish bias on Thursday, the first step toward a possible interest-rate cut this year as inflation drifts lower and the economy slows. The 25 bps rate cut has come after a period of one-and-a-half years (the last one was in August 2017).

The NSE Nifty initially slipped but closee up 0.06 percent at 11,069.40 while the 10-year benchmark government bond yield fell to 7.51 percent from Wednesday's close of 7.56 percent.

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