RBI Cuts Repo Rate by 50 bps; Keeps CRR at 4%

The Reserve Bank of India (RBI) lowered the benchmark repo rate by 50 basis points to 6.75 percent, while keeping CRR and SLR unchanged at 4 percent and 21.5 percent, respectively. This marks the fourth repo rate cut by the RBI since January 2015. However, it has lowered its FY16 GDP growth target to 7.4 percent from 7.6 percent. It also said the focus should now shift to bringing inflation down to 5 percent by FY17-end.

However, the RBI cautioned that since the third bi-monthly statement of August 2015, global growth has moderated, especially in emerging market economies (EMEs), global trade has deteriorated further and downside risks to growth have increased.

However, there are a lot of questions on the impact of poor monsoon on inflation. The RBI said looking forward, inflation is likely to go up from September for a few months as favourable base effects reverse.

RBI said it expects CPI inflation to average around 5.5 percent in October-December and 5.8 percent in January-March 2016 and finally moderate to 4.8 percent in January-March 2017.

Also, the RBI said Indian corporates can now issue rupee denominated bonds with a minimum maturity of five years at overseas locations within the ceiling of foreign investment permitted in corporate debt.

While India’s currency has tumbled with emerging-market peers this year, as a commodity importer it has benefited from the fall in everything from oil to iron, which has pulled down the country’s inflation rate.

The move -the biggest cut since the 2009 global recession -could ease tensions with the Finance Ministry, which had advocated for a reduction for months. The Reserve Bank of India is also engaged with the ministry on a reform of the central bank that would establish a monetary policy committee to set rates.

Attention now turns to the degree to which India’s banks pass on the rate cut. Lenders have been reluctant to pass on the full force of past reductions, after an increase in non-performing loans. In a positive sign, the largest state-owned bank said it would cut its main lending rate by 0.4 percentage point. 

Indian stocks climbed as investors applauded today’s news, while the rupee strengthened against the dollar and the yield on the 10-year sovereign bond plunged to a July 2013 low.

Rajan said the January target “is likely to be achieved” and “the focus should now shift to bringing inflation to around 5 percent” by March 2017. The central bank forecast consumer-price inflation at 4.8 percent in the first three months of 2017.